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Financial regulations, risk management and value creation in financial institutions: evidence from Europe and USA


par Agborya-Echi Agbor-Ndakaw
University of Sussex - Master of Science 2010
  

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1.6 Summary of Methodology

The research methods to be used will be the secondary and tertiary methods. This will entail the reading of textbooks and financial websites and journals. With the information collected from these methods, the researcher will be able to know the extent to which the notion of financial regulations, risk management and value creation influence investment decisions in financial institutions and whether there exists other factors that influence these investment decision-making process and how these factors act up with financial regulation, risks management and value creation as far as investment decision-making is concern in financial institutions.

1.7 Summary of Chapters

This research will be made up of five chapters with chapter one being based on providing
justifications for the study and bringing out the general idea about the entire research, stating

the objectives and the hypotheses of the study ,as well as the rationale of the study and its implications though from different perspectives.

Chapter two brings out the theoretical as well as the empirical literature on financial regulations, risk management and value creation and the role they play in investment decision-making. In this chapter, all the key terms will be defined as well as looking into the relationship existing between the key terms. The last part of this chapter is dedicated to the investment decision-making process and how behavioural factors as well as some financial assets influence the investment decision-making process within the financial sector.

For the purpose of our research, chapter three will be based on providing arguments on the methods used in carrying out the research as well bringing out the short comings of the methodology.

Chapter four will be responsible for the analysis and discussion of the findings.

Chapter five will be dedicated to the conclusion and proposition of a frame work (recommendations) which can be of help for future research work.

1.8 Summary of Chapter One

The back bone of this chapter is the provision of a general background and a justification for the research. This chapter contains the research questions, hypotheses, aims and objectives of the study. It has as well as provided a summary of the methodology to be used through out the research.

CHAPTER TWO
LITERATURE REVIEW

2.1 Introduction

This chapter centres around the existing literature on aspects relating to financial regulations, risk management and value creation with regards to investment decision. There exist different scholars with different theories and arguments in relation to this study. This chapter aims at examining secondary as well as tertiary data collected from textbooks, journals, magazines and internet websites/sources.

2.2 Definition and Meaning of Risk

It is evident that everything done in our normal day to day activity involves some aspect of risk-taking. This is to say from getting out of bed to going to sleep, driving a car to merely crossing a road or making an investment decision, all centre on an aspect of risk-taking. Fortunately, the whole idea on risk is very interesting because while some risks might be out of control others are not.

Many schools of thought claim that the word risk is thought to have originated from either the Arabic word `risq? or the Latin word `riscum?, with `risq? signifying something given by God from which a profit can be drawn thus having either a fortuitous or favourable outcome (Merna and Al-Thani, 2008).

Economists claim that the Latin word `riscum? refers to barrier challenges presented to a soldier. Although it has a fortuitous connotation, it is more likely linked to unfavourable events. This word was first ever used in English around the mid-seventeen century with it featuring in insurance transactions in the eighteen century although it has also been used in

both French and Greek with both resulting to positive and negative connotation. Amazingly, throughout the years, the common usage of the word in English has changed though statistics has proven that every aspect of our daily life involves some degree of risk-taking. Hence as a result of this, in today modern day English, there is literally no generally accepted definition for the term risk.

There is a wide range of descriptions that have developed over time as different schools of thought and authors including Slovic (1964), Payne (1973) and Webber (1988) came up with different meanings and descriptions. It has been revealed that just within the field of accounting and behavioural finance, there exist more than 150 unique accounting, financial and investment measurement still under investigation and these have up to date remain as potential risk indicators, (Ricciardi, 2004).

Owing to the above mentioned points, it is clear that the definition of risk can be looked at from different perspectives with every particular discipline coming up with its own definition and meaning of risk. According to Lane and Quack (1999), risk can be defined as follows:«...a state in which the number of possible future events exceeds the number of actually occurring events and some measure of probability are unknown can be attached to them. Risk is thus seen to differ from uncertainty where the probabilities are unknown. Such a definition is beholden to mathematically inspired decision theory and the rational actor? model, and does not sufficiently consider the complexity of risk in business.»( p.989).

Owing to the point that the definition of risk is being looked at from different perspectives, Brehmer, (1987) brought to light the fact that the different definitions of risk differ significantly regarding the specific activity, situation and circumstances. This opinion was further supported by Rohrmann and Renn, 2000 where it was explained that with regards to disciplines such as engineering, physics and toxicology, a definition of risk may be based on

the probability as well as the physical measurements of the negative outcomes. In the social sciences, risk is looked differently again with attention being paid to the qualitative aspects of risk which are seen as crucial facets of the concept.

Reading from Kaplan and Garrick (1981) risk is looked upon as a combination of Uncertainty and Damage. As if that is not enough, Frank Knight (1921) tries to provide a meaning to the word risk explaining the notion of risk differentiating it from uncertainty.«... Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. The term «risk,» as loosely used in everyday speech and in economic discussion, really covers two things which, functionally at least, in their causal relations to the phenomena of economic organisation, are categorically different... The essential fact is that «risk» means in some cases a quantity susceptible of measurement, while at the other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomenon depending on which of the two is really present and operating.... It will appear that a measurable uncertainty, or «risk» proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all. We ... accordingly restrict the term «uncertainty» to cases of the non-quantitative type». (Damodaran, 2008).

According to Knight (1921) risk/certainty can be separated with reference to two different points of view (a) knowing the future outcome and (b) knowing the probability that a future outcome will occur is known. Looking at the various definitions of risk, it can be concluded that the definition and meaning of risk can be summarised as the potential recognition of an undesirable consequence that is to happen to anybody. Therefore there exists a relationship between danger and opportunity whereby there is a need to strike a balance as to when to expect higher returns/rewards which comes with the opportunity as well as the risk involved that has to be born as a consequence of the danger. No doubt, Haslem (2003) attempts in

defining/explaining risk from the financial point of view by introducing the notion of return to the definition of risk by stating that:«Risk is the other side of return. Returns comprise of two elements, the periodic payment of interest or dividends (yield) and change in asset values over a period of time (capital gains/losses).»

Judging from all the definitions of risk mentioned above, it is evident that risk is not very simple especially as it is being looked up to by different schools of thought. This then boils to that fact risk itself is subjective and will be very difficult in attempting to manage it.

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