Since the activities of market participants can be influenced by financial outcomes, providing accurate forecasts of these financial outcomes can help participants to reduce the risk of adjusting to any market change in the future. Predictions of financial outcomes have usually been obtained by conventional statistical models based on researchers' knowledge. With the development of data collection and storage, an extensive set of explanatory variables will be extracted from big data capturing more economic theories and then applied to predictive methods, which can increase the difficulty of model interpretation and produce biased estimation. This may further reduce predictive ability. To overcome these problems, variable selection techniques are frequently employed to simplify model selection and produce more accurate forecasts. In this PhD thesis, we aim to combine variable selection approaches with traditional reduced-form models to define and forecast the financial outcomes in question (market implied ratings, Initial Public Offering (IPO) decisions and the failure of companies). This provides benefits for market participants in detecting potential investment opportunities and reducing credit risk. Making accurate predictions of corporate credit ratings is a crucial issue for both investors and rating agencies, since firms' credit ratings are associated with financial flexibility and debt or equity issuance. In Chapter 2, we attempt to determine market-implied credit ratings in relation to financial ratios, market-driven factors and macroeconomic indicators. We conclude that applying variable selection techniques, the least absolute shrinkage and selection operator (LASSO) and its extension (Elastic net) can improve predictive power. Moreover, the predictive ability of LASSO-selected models is clearly better than that of the benchmark ordered probit model in all out-of-sample predictions. Finally, fewer predictors can be selected into LASSO models controlled by BIC-type tuning parameter to produce more accurate out-of-sample prediction than its counterpart AIC-type selector. Next, the LASSO technique is further applied to binary event prediction. A bank's decision to go public by issuing an Initial Public Offering (IPO) is the binary object in Chapter 3, which transforms the operations and capital structure of a bank. Much of the empirical investigation in this area focuses on the determinants of the IPO decision, applying accounting ratios and other publicly available information in non-linear models. We mark a break with this literature by offering methodological extensions as well as an extensive and updated US dataset to predict bank IPOs. Combining the least absolute shrinkage and selection operator (LASSO) with a Cox proportional hazard, we uncover value in several financial factors as well as market-driven and macroeconomic variables, in predicting a bank's decision to go public. Importantly, we document a significant improvement in the model's predictive ability compared to standard frameworks used in the literature. Finally, we show that the sensitivity of a bank's IPO to financial characteristics is higher during periods of global financial crisis than in calmer times. Moving to another line of variable selection techniques, Bayesian Model Averaging (BMA) is combined with reduced-form models in Chapter 4. The failure of companies is closely related to the health of the whole economy, since the beginning of the most recent global crisis was the bankruptcy of Lehman Brothers. In this chapter, we forecast the failure of UK private firms incorporating with financial ratios and macroeconomic variables. Since two important financial crises and firm heterogeneities are covered in our dataset, the predictive powers of candidate models in different periods and cross-sections are validated. We first detect that applying BMA to the discrete hazard models can improve the predictive performance in different sub-periods. However, comparing the results with classified models, it should be noted that the Naive Bayes (NB) classifier provides slightly higher predictive accuracy than BMA models of discrete hazard models. Moreover, the predictive performance of the discrete hazard model and its BMA version are more sensitive to adding time or industry dummy variables than other competing models. Considering financial crisis or firm heterogeneity can influence the predictive power of each candidate model in the out-of-sample prediction of failure.

The current thesis is a collection of essays on costly signaling, smoothing (partial adjustment), and risk shifting through various pay outs by bank holding firms. The thesis is based on three chapters, or sections, which are through econometric investigations on the above mentioned topics. The major findings of the investigations are, one, a detailed firm level information content analysis of costly signaling by banks via different pay out methods, two, that partial adjustment or smoothing via pay outs can also be perceived as costly signals which is based on the information content of allied measures like bank specific speed of adjustments, and half-life periods, three, that rather than dividend pay outs share repurchases play relatively significant role in risk shifting exhibited by banking firms. Chapter 1 is devoted to the analysis of different types of dividend and other pay out signaling under information asymmetry (between the outsider shareholders of banks and the insider managers), and impact of various bank specific variables on the levels of pay outs/ signaling, thus revealing the information content of such signaling. Both panel data analysis and vector auto regression analysis have been conducted to achieve these findings. Another finding in this section is a comparative analysis between share repurchases and dividend pay outs by bank holding firms. Chapter2 is devoted to the investigation of bank specific partial adjustments of dividends, a modified partial adjustment model is used which is capable of investigating bank specific speeds of adjustments and half-life periods which may vary over periods. Such a model is an improvement over basic smoothing models in the standard literature which have mainly investigated the industry average speed of adjustment, and hence less efficient in investigating the bank specific information content of such measures. Chapter 3 provides analysis based on a system of equations model on, one, whether risk shifting has been exhibited by the bank holding firms for a comprehensive period between 1990-2015, and two, which are the specific pay out channels through which such risk shifting or wealth transfers have taken place.

This thesis advances the research on the quadrature (QUAD) method. We aim to make it more computationally efficient, apply it to different underlying processes and even develop a new breed of QUAD method. QUAD is efficient in many ways except when it comes to options with early exercise opportunities such as Bermudan or American options. We develop a series of acceleration techniques for the QUAD method to improve its implementation. After that, we show how to apply the accelerated QUAD method to pricing American options under lognormal jump diffusion and stochastic volatility jump diffusion processes. QUAD is more efficient in dealing with jump processes compared with other numerical techniques such as the finite difference method and the Monte Carlo method, as long as the transition probability density of those processes are known. When the transition probability density is not known in closed-form, this thesis explores a new approach by combining the finite difference method with QUAD (FD-QUAD) - since density can be calculated numerically using the finite difference methods. Overall, this thesis greatly improves and advances the quadrature method in option pricing.

This doctoral thesis investigates various capital structure and investment decisions of non-financial firms when (i) banks of the firms become riskier after the Global Financial Crisis (ii) firms operate in countries with heterogeneous financial architecture i.e. bank-oriented and market-oriented countries and (iii) firms face increased macroeconomic uncertainty after the crisis. We also treat Global Financial Crisis of 2007 as an exogenous shock to the supply of capital and investigate the impact of the crisis on different financing and investment decisions of non-financial firms. We examine the cross section of the firms and investigate the differential behaviour of higher growth firms (as measured by Tobin's Q). The central finding of this thesis is that financial architecture is one of the most important determinants of capital structure and investment decisions of non-financial firms. When higher growth firms operating in market-oriented countries face an increase in the market riskiness of banks after the crisis, these firms do not suffer a decrease in overall leverage and the level of investment. These higher growth firms in market-oriented countries also have lower cost of debt and higher intensive and extensive margins of bond financing. Finally, the probability of bank loans and equity (bonds) issuance decrease (increase), after an increase in the downside macroeconomic uncertainty after the crisis. We carefully control firm's demand for credit using various proxies, therefore all our results point towards supply side effect of credit.

This thesis presents three studies related to the effects of liquidity on financial markets. The first topic explores the relationship between funding liquidity and credit default swap (CDS) spreads. Using panel estimations, this study provides evidence that a tightening of funding liquidity increases spreads, effect which is three times larger in magnitude for high-CDS entities compared to low-CDS firms. Moreover, this paper highlights the impact of the 'CDS Small Bang' regulatory changes, especially the introduction of fixed coupons which induced upfront fees for trading CDSs. We find that after the introduction of the fees, funding liquidity changes have a much larger and more significant impact on CDS spread changes. The second study presents an empirical investigation of the theoretical predictions of Brunnermeier and Pedersen (2009) connecting funding liquidity with market liquidity and volatility and an extension of these linkages to CDS spreads. Specifically, in a European context, this paper documents that: (i) funding conditions co-move with illiquidity, volatility and CDS spreads, (ii) during tight funding conditions, illiquid, volatile and high-CDS spread securities become particularly illiquid, (iii) a tightening of funding liquidity increases CDS spreads, this effect being stronger if funding conditions were already constrained, (iv) a deterioration of funding liquidity decreases contemporaneous returns , and (v) funding shocks are priced in the cross-section of illiquidity-sorted portfolios The third study examines the relationship between monetary policy and stock liquidity, in the context of the U.K. market. In line with the inventory paradigm of market microstructure and theories linking capital constraints with market illiquidity, this study documents that a con tractionary (expansionary) monetary policy reduces (increases) stock liquidity. Moreover, this study finds that the effect of monetary policy on stock liquidity depends on the liquidity proxies chosen, decreases with firm size , increases with firm volatility, and is stronger during the 2007-2009 financial crisis.

Academic and professional attention towards ethics in business in general and audit ethics in particular has grown significantly following well-documented audit failures and corporate scandals. Several empirical studies have been carried out to investigate the factors underlying such auditors’ ethics. The majority has been done in the USA and other developed countries, often using undergraduate student convenience samples. They have provided clearly mixed results and have tended to focus on only one or two stages of the ethical decision making (EDM) model devised by Rest (1986). This study sought to build and improve on the previous research by investigating the impact of a broad set of personal, organisational, and issue-specific variables on three stages of external auditors’ EDM process. Moreover, it did so in a developing country, namely Egypt, which is the largest country by population in the MENA (Middle East and North Africa) region. This study hypothesised that personal variables (gender, age, educational level, position level, work experience, certification status, professional commitment, and personal moral philosophy), organisational variables (code of ethics, firms size, ethical climate types), and moral intensity dimensions are significantly related to the different stages of external auditors’ EDM process. Using a relatively large sample, data was collected via a questionnaire which include four context-based external audit ethics scenarios. An adapted Arabic version of the questionnaire translated using translation-back translation technique was administered to Egyptian participants and usable responses were received from 393 external auditors working for 19 international audit firms in Egypt. For each scenario, the EDM process was examined in terms of the recognition, judgment and intention stages of Rest’s model. While moral intensity was originally conceptualised as a six-dimensional construct, factor analysis revealed only two dimensions, which were named ‘perceived social pressure’ and ‘actual harm’. Results show that these two dimensions, particularly social pressure, are the strongest predictors of auditors’ three stages of EDM. Ethical climate types and personal moral philosophy also showed some significant results. Significant and positive results were also found regarding firm size, work experience, position level, and certification status. However, findings revealed that age, educational level, code of ethics, and professional commitment have very limited impact on auditors’ EDM stages. Interestingly, when gender differences were found, male auditors exhibited more ethical choices than females. Findings reinforces the need to give more attention to auditors’ socialisation and training, as well as the importance of continuing professional education to enhance auditors’ EDM abilities. Egyptian audit firms should also pay more attention to their organisational ethical infrastructure and maintain an organisational consensus regarding unethical acts. Using alternative methodologies and inclusion of the ethical behaviour stage in future studies, may aid future research in complementing these results, thus provide an enhanced understanding of auditors’ ethical decisions. At the very least, future studies should study all the first three stages, as in this research, rather than focusing on only one or two stages. Additionally, cross-cultural audit ethics studies represent a fruitful avenue for future research. The questionnaire used in this study could be used, with minimal adaptations, in other countries.

This thesis critically analyses the deficits-inflation nexus and inflation targeting in lower-income countries. Previous research has found a significant relationship between fiscal deficits and inflation in low-income countries, but not in high-income countries. It is shown here that the crucial factor is the quality of institutions. The relationship holds in countries with weak institutions, but not in those with strong institutions, even if their per capita GDP is quite low. The implication is that institutional improvements can enhance macroeconomic outcomes in poor countries. The robustness of the findings is tested using various measures of institutional quality. On the other hand, we provide new insights on inflation targeting (IT) in low-income countries. Previous research on inflation targeting has focused on high-income and emerging market economies since low-income countries (LICs) were slow to adopt the framework. Only recently has enough data accumulated for the performance of IT in LICs to be assessed. We show that unlike in emerging markets, in LICs IT is not been effective in reducing inflation. Weak institutions, a typical feature in LICs, do help explain this especially when we examine their role under floating exchange rate regimes. Finally, we characterise monetary policy in Ghana, one of the earliest low-income countries to adopt an IT framework, but where IT has not been very successful in reducing the levels and volatility of inflation within a modified Taylor rule. We investigate whether poor conduct of monetary policy is responsible for the poor performance of IT and find that is not. Monetary policy reaction functions are similar to those estimated for countries with successful monetary policies, and interest rates respond in the theoretically recommended way to inflation shocks.

This thesis consists of 3 empirical papers examining the capital structure and debt maturity determinants from a developing economy perspective. Chapters 1 and 2 focus on firm-level determinants of local currency and foreign currency borrowing in South Korea over the period 1990 - 2006, which includes the 1997-1998 Asian financial crisis. Chapter 3 conducts a cross-country analysis using a dataset from the Middle East and Africa region (MEA hereafter) to study the firm level and institutional environment effects on debt maturity choices. The first chapter uses capital structure theories to investigate whether there are common factors affecting both foreign and domestic currency denominated debt in South Korea. The dataset used includes 18,827 observations for 4017 listed and unlisted manufacturing firms. As not all firms have both types of debt (local and foreign), our debt ratios dependent variables contain a good proportion of zero values, which motivates the use of the random effects Tobit model. We find that firm size, profitability, liquidity, asset tangibility, and leverage are common determinants for foreign and local currency borrowing including. We also find that the effect of certain capital structure determinants changed from one period to another. The second chapter examines the determinants of foreign currency corporate debt maturity in South Korea. The chapter relies on both debt maturity and foreign currency debt theories. The data set includes 4,066 manufacturing firms observed over the period 1990-2006. Since the debt maturity dependent variable contains a large proportion of zeros due to the fact that many firms do not have long-term debt, the random effects Tobit model is utilized. Our findings suggest that debt maturity decisions of Korean firms are dependent on firm-specific variables, which lend support to both debt maturity and foreign currency debt theories. The third chapter uses insight from institutional theories to examine the influence of institutional quality on corporate debt maturity choices in the MEA region. The dataset covers annual information for 1,163 firms from 21countries observed over the period 2006-2014. We separate the Arab Spring countries from the rest of the MEA countries to test whether institutional quality has a different effect on debt maturity structure given the cross-country corporate environment variations. Our random effects Tobit model results suggest that elements of countries institutional environment and lending infrastructure prove influential to the debt maturity choices for the MEA region firms.

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