Advances in Longitudinal Data Methods in Applied Economic Resear 2021

Springer Proceedings in Business and Economics
Nicholas Tsounis
Aspasia Vlachvei Editors
Advances in
Longitudinal
Data Methods in
Applied Economic
Research
2020 International Conference
on Applied Economics (ICOAE)
More information about this series at http://www.springer.com/series/11960
Nicholas Tsounis • Aspasia Vlachvei
Editors
Advances in Longitudinal
Data Methods in Applied
Economic Research
2020 International Conference on Applied
Economics (ICOAE)
Editors
Nicholas Tsounis Aspasia Vlachvei
Laboratory of Applied Economics, Laboratory of Applied Economics,
Department of Economics Department of Economics
University of Western Macedonia University of Western Macedonia
Kastoria, Greece Kastoria, Greece
ISSN 2198-7246 ISSN 2198-7254 (electronic)

ISBN 978-3-030-63969-3 ISBN 978-3-030-63970-9 (eBook)
https://doi.org/10.1007/978-3-030-63970-9
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland
AG 2021
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Preface
This year conference is co-organised by the Hellenic Open University (HOU) and
the Department of Economics of the University of Western Macedonia, Greece.
Unfortunately, due to the coronavirus pandemic the conference has not taken
place in Heraklion, Crete, where it would have been hosted by the Hellenic Open
University at Archanes after the kind invitation by Prof. George Agiomirgianakis
who is also co-chair of the conference, but it is a virtual conference.
The aim of the conference is to bring together economists from different fields
of Applied Economic Research in order to share methods and ideas.
The topics covered include:
• Applied Macroeconomics
• Applied International Economics
• Applied Microeconomics including Industrial Organisations
• Applied work on International Trade Theory including European Integration
• Applied Financial Economics
• Applied Agricultural Economics
• Applied Labour and Demographic Economics
• Applied Health Economics
• Applied Education Economic
All papers presented in ICOAE 2020 and published in the conference proceed-
ings were peer reviewed by anonymous referees. In total, 54 works were submitted
from 13 countries while 40 papers were accepted for presentation and publication
in the conference proceedings.
The acceptance rate for ICOAE 2020 was 74%.
The full text articles will be published online by Springer in the series “Springer
Proceedings in Business and Economics”
The organisers of ICOAE 2020 would like to thank:
• The Scientific Committee of the conference for their help and their important
support for carrying out the tremendous work load organising and synchronising
v
vi Preface
the peer-reviewing process of the submitted papers in a very specific short period
of time.
• The anonymous reviewers for accepting to referee the submitted conference
papers and submit their reviews on time for the finalisation of the conference
programme.
• The keynote speaker, Dr. Giovanni Cerulli from the Research Institute on
Sustainable Economic Growth, National Research Council of Italy, for accepting
to present his work on the Covid-19 outbreak.
• The organising committee for its help for the success of the conference.
• Dr. Eirini Arvanitaki, Mr. Gerassimos Bertsatos, Mr. Lazaros Markopoulos, and
Mr. Stelios Angelis for secretarial and technical support.
Kastoria, Greece Nicholas Tsounis
Kastoria, Greece Aspasia Vlachvei

Contents
Forecasting the South African Financial Cycle: A Linear

and Non-Linear Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Milan Christian de Wet
From Clubs to Communities. From Tourists to International
Friends. Crisis Legacy in Music Organizations with Revenue
Management and Relationship Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Angela Besana and Annamaria Esposito
Measuring Dynamic Capabilities-Based Synergies in M&A Deals
with Real Options: Amazon’s Acquisition of Whole Food . . . . . . . . . . . . . . . . . . 43
Andrejs Čirjevskis
Raising Rivals’ Costs When the Downstream Firms Compete
in Stackelberg Fashion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Jacek Prokop and Adam Karbowski
Comparing Five Generational Cohorts on Their Sustainable
Food Consumption Patterns: Recommendations for Improvement
Through Marketing Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Irene Kamenidou, Spyridon Mamalis, Ifigeneia Mylona,
and Evangelia Zoi Bara
The Effect of Budgetary Policies on the Economy Activity
in Algeria: A Markov Switching Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Touitou Mohammed
Structure of Bond Pension Funds During Decreasing Yield Curves . . . . . . . 95
Mário Papík
Extracting Common Factors from Liquidity Measures
with Principal Component Analysis on the Polish Stock Market . . . . . . . . . . . 109
Joanna Olbrys and Elzbieta Majewska
vii
viii Contents
The Mechanism of Political Budget Cycles in Greece . . . . . . . . . . . . . . . . . . . . . . . . 123

George Petrakos, Konstantinos Rontos, Chara Vavoura,
and Ioannis Vavouras
Examination of Business Interest in Level of Complexity of Facial
Biometric Technology Implementation in Slovakia . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Michal Budinský and Janka Táborecká-Petrovičová
Innovation and Sales Growth Among Heterogeneous Albanian
Firms: A Quantile Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Blendi Gerdoçi and Sidita Dibra
Quantitative Analysis of Inequalities at ICT Sector in Visegrad
Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Tatiana Corejova, Roman Chinoracky, and Alexandra Valicova
Does Government Spending Cause Investment?: A Panel Data
Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Nihal Bayraktar
An Exploratory Study of Fans’ Motivation in Albanian Football
Championship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
Julian Bundo and Mirdaim Axhami
Evaluation of Knowledge in Accounting of Regional Economic
University Students . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
Ivana Koštuříková and Markéta Šeligová
Corporate Governance Disclosure in Slovak Banks . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Janka Grofčíková, Katarína Izáková, and Dagmar Škvareninová
Implementation of Critical Reflection Analysis in Teaching
and Learning Focused on Developing Critical Thinking Skills . . . . . . . . . . . . . 233
Lenka Theodoulides and Gabriela Nafoussi (Kormancová)
Comparison of Methods of Poverty Rates Measurement . . . . . . . . . . . . . . . . . . . . 249
Anna Saczewska-Piotrowska
˛
The Role of Strategic Agility and Economic Environment’s
Friendliness-Hostility in Explaining Success of Polish SMEs . . . . . . . . . . . . . . . 267
Tomasz Sikora and Ewa Baranowska-Prokop
Macroeconomic Determinants of NPLs Using an Extended Sample
and Dominance Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
George Sfakianakis, George M. Agiomirgianakis, and George Manolas
Aspects of Financial Accounting and Managerial Accounting
Outputs in Connection with the Decision-Making Processes
of Accounting Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297
Markéta Šeligová
Contents ix
Movies Performance: Empirical Evidence from Italy . . . . . . . . . . . . . . . . . . . . . . . 311

Anna Maria Bagnasco
Patterns of Knowledge Creation in European Regions: An Analysis
by the Phases of the EU-Enlargements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325
Thomas Baumert
Influence of Economic Sanctions: Empirical Evidence for Iran
and Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345
Anton Filipenko, Olena Bazhenova, Roman Stakanov, and Ihor Chornodid
Corporate Governance and Its Association with Audit Opinion:
The Case of Greece. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357
Georgia Boskou, Maria Tsipouridou, and Charalambos Spathis
CO2 Emissions, Energy Consumption, Economic Growth, Trade,
and Urbanization in Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379
Pavlos Stamatiou, Chaido Dritsaki, and Dimitrios Niklis
Does the Time-Driven ABC Method Apply in a Construction
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391
N. Kartalis, Ath Patsios, I. Velentzas, G. Broni, G. Charitoudi, G. Panoy,
and G. Kiriakoylis
Economic Crisis Predictors Revisited in Preparation for
the COVID-19 Aftermath . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409
Demosthenes Georgopoulos, Theodore Papadogonas,
and George Sfakianakis
Should Market Makers Hedge with Realised or Implied Volatility? . . . . . . . 421
Alexis Levendis, Pierre Venter, and Eben Maré
Stress Testing Option Sensitivities in a Stochastic Market . . . . . . . . . . . . . . . . . . 431
Firm Performances and the Onset of Shocks in India . . . . . . . . . . . . . . . . . . . . . . . 445
Elangovan Avinash
Filter or No Filter? An Instagram View on Modern Visual Culture . . . . . . . 459
Aikaterini Stavrianea, Evangelia Besleme, and Irene (Eirini) Kamenidou
The Neoclassical Approach for Measuring Total Factor
Productivity: The Case of the Greek Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469
Thomas Siskou and Nicholas Tsounis
Consumers’ Motives for Visiting Social Media Brand Pages
and Social Media Advertisements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493
E. Iliopoulou and A. Vlachvei
x Contents
Factors Affecting e-Marketing Adoption and Implementation

in Food Firms: An Empirical Investigation of Greek Food
and Beverage Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 509
Ourania Notta and Afroditi Kitta
An Application of Differential Equations on Anthropogenic Climate
Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527
Gerassimos Bertsatos, Soultana Moustakli, Zacharoula Kalogiratou,
and Theodoros Monovasilis
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 535
Forecasting the South African Financial
Cycle: A Linear and Non-Linear
Approach
Milan Christian de Wet
Abstract Identifying optimal models to forecast economic cycles has been a point
of great consideration in literate. A key point of debate in the literature is whether
linear or non-linear models perform best at forecasting economic cycles. The
literature largely forces on the forecasting of business cycles, and very limited work
has been done on financial cycle forecasting. Given the proven destructiveness of
financial cycles, the ability to accurately forecast future financial cycle movements
in an economy could aid policymakers in managing such cycles. This article
evaluates the forecasting performance of both the non-linear Markov Regime-
Switching Autoregressive methodology and Smooth Transition Autoregressive
methodology relative to the benchmark ARIMA model in forecasting the aggregate
South African financial cycle over different time horizons. A fixed window rolling
forecast approach is followed, whereby the performance of forecasting the aggregate
South African financial cycle 3-steps forward, 6-steps forward, 12-steps forward,
18-steps forward and 24-steps forward is evaluated. The findings indicate that the
linear ARIMA model outperforms the non-linear MSMV-AR and LSTAR models
at forecasting short periods ahead such as 3–6 months ahead. However, both the
MSMV-AR and LSTAR models outperform the ARIMA model, given a longer
time horizon such as 12–24 months. Hence, to forecast the aggregate South African
financial cycle 3–6 months ahead policymakers should use an ARIMA. However,
the MSMV-AR and LSTAR models should be used to forecast the aggregate South
African financial cycle 12–24 months ahead.
Keywords Non-linear forecasting · Financial cycles · Markov switching

· STAR · Regime shifts
M. C. deWet ()
University of Johannesburg, Johannesburg, South Africa
e-mail: Miland@uj.ac.za
© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 1

N. Tsounis, A. Vlachvei (eds.), Advances in Longitudinal Data Methods in Applied
Economic Research, Springer Proceedings in Business and Economics,
https://doi.org/10.1007/978-3-030-63970-9_1
2 M. C. de Wet
1 Introduction
Financial crises have plagued the economies for the past four decades, of which
the 2007/2008 financial crisis was the most severe. The financial crisis of 2007
triggered the most severe global economic contraction since the great depression.
The financial crisis of 2007 had a negative economic impact on almost all advanced
economies and the majority of emerging economies in the world, with only a
few exceptions. Furthermore, the financial crisis in Japan during the 1980s and
1990s had severe implications for the Japanese economy. Emerging markets, in
particular, have been plagued by disruptive financial crises, such as the Mexican
financial crisis that began in 1994, the Asian crisis that began in 1997 and the
Argentinian crisis that began in 2001 to name a few. All these examples proved
to be a result of an unsustainable financial build-up of some sort. This signals the
need for policymakers to improve their understanding of financial conditions and to
obtain a means to improve their ability to manage cyclical fluctuations and the effect
of such fluctuations.
For the most part, before 2007, policymakers neglected the role played by
financial factors and the potentially disruptive impact fluctuations in these factors
might have on the real economy (Borio, 2014; Strohsal, Proano, & Wolters, 2019). A
possible reason why policymakers neglected financial conditions is that policymak-
ers largely believed that financial conditions are driven by real economic conditions,
and not the other way around (Borio, Drehmann, & Xia, 2018). Therefore, the need
to understand the state of financial conditions in an economy seemed less important.
Over the past four decades, however, financial crises around the world have proven
otherwise.
The 2007/2008 financial crisis caught the attention of policymakers, resulting
in the realization that the old school of thought, which places all the attention
on the real economy, is not completely accurate and effective. The 2007/2008
financial crisis provided clear evidence that financial factors of an economy could
be disconnected from the real economy, and extremely disruptive when in disequi-
librium. Therefore, financial factors could not merely be monitored and managed
through simply monitoring and managing real economic conditions. Hence, specific
attention needs to be paid to the cyclicality and cyclical state of financial variables in
an economy to fully gauge the financial state of an economy and thereby employing
effective management in this regard. After the 2007 financial crisis, policymakers
need to re-evaluate how they consider financial factors and how they should go about
monitoring and managing financial factors in such a way that extensive financial
build-ups and financial disequilibrium are mitigated or avoided. This is to avoid
potential future damage that could be caused by such build-ups and disequilibria.
The ability to accurately forecast financial cycle movements could aid in this regard.
The value of information that timely and accurately indicates the future devel-
opment of economic cycles is vast. The importance of such information has led
to extensive research on developing means to forecast future moves in aggregate
economic cycles. Therefore, the forecasting of economic cycles has received a
Forecasting the South African Financial Cycle: A Linear and Non-Linear Approach 3
significant amount of attention since the initial groundwork on cyclical research by

Burns and Mitchell (1946). The main reason for this interest is the major economic
benefits that lie within the ability to accurately and timely forecast future cyclical
fluctuations. The ability to timely and accurately predict future turning points in
economic cycles will afford policymakers a means to make more timely policy
decisions relating to cyclical fluctuations, and other economic participants to better
position themselves for future fluctuations. From cyclical forecasting research, a
large number of forecasting models have been suggested, implemented and tested
on a wide range of economic cycles, of which business cycles are by far the
economic cycle subject to the most research. Major debates in the literature and
practice prevail around which models perform best at forecasting economic cycles.
Empirically, a lot of mixed results on this topic exists, indicating that optimality
varies from cycle to cycle.
For example, the debate between linear and non-linear forecasting models.
Botha, Greyling, and Marais (2006) groups econometric models to forecast eco-
nomic cycles into two major groups, namely linear models and non-linear models.
Botha et al. (2006) states that one of the major debates in the literature regarding
the forecasting of economic cycles is around the forecasting performance of linear
and non-linear models as a means to forecast economic cycles. The debate thus
considered whether forecasting models should allow for non-linearities amongst
the relational dynamics between a financial cycle under analysis and corresponding
endogenous and exogenous explanatory variables during different cyclical phases.
Furthermore, within each of these broad two groups, a range of models exists,
and even within each group, a lack of consensus exists on which models perform
optimally at forecasting economic cycles.
Varying viewpoints and empirical results make it challenging for policymakers,
as well as other economic participants, such as asset managers, business managers
and risk managers, to depend on a given set of forecasts, hindering optimal decision-
making and actions from these various parties. This limitation is amplified when
considering financial cycles, given that very limited research has been done to
identify optimal models to forecast financial cycles. This study will contribute
to the body of knowledge on economic cycles forecasting through identifying a
model that performs optimally at forecasting the aggregate South African financial
cycle. Henceforth, this study will be structured as follows. Firstly, a literature
overview is provided in Sect. 2. Then a data description will be provided, and the
methodological approach to be followed in this study will be stipulated in Sect. 3.
In Sect. 4, the results will be presented, and a corresponding discussion of results
will be provided. Finally, the conclusion will be provided in Sect. 5.
2 Literature Overview
Despite very limited to no work done on forecasting aggregate financial cycles,

the body of knowledge on research done on forecasting business cycles, as well as
4 M. C. de Wet
various financial variables, is vast. Even though not an exhaustive list, examples of
empirical work done in this field are the work done by Laubscher (2019), Nyberg
(2018), Wai, Kun, Ismail, and Karim (2015), Singh (2012), Baharumshah and Liew
(2006), Botha et al. (2006), Teräsvirta, Van Dijk, and Medeiros (2005), Marcellino
(2005), Moolman (2004), Crawford and Fratantoni (2003), Sarantis (2001), Rech
(2002), Tkacz (2001) and Clements and Krolzig (1998). Given the lack of literature
on financial cycle forecasting, the literature on business cycle forecasting will be
utilized as an empirical base.
Several researchers such as Botha et al. (2006), Teräsvirta et al. (2005), Moolman
(2004), Sarantis (2001), and Clements and Krolzig (1998) consider the linear autore-
gressive integrated moving average (ARIMA) as a benchmark model for research on
forecasting performance. The forecasting with linear econometric models typically
utilizes linear co-movements of economic elements with the forecasted variable
under consideration (Teräsvirta et al., 2005). Writes that linear forecasting models
include econometric models such as ARIMA, classic linear multiple regression
models, probit and logit regression models and vector autoregressive (VAR) models.
Linear models, such as linear regression models, assume linear relational dynamics
between a cyclical measure and given explanatory variables, thus not accounting
for any asymmetries. As a result, linear models do not account for any cyclical
asymmetries.
However, economic cycles do not typically evolve in linear fission, but often
exhibits asymmetrically sharp movements during cyclical downturns relative to
upturns (Bouali, Nasr, & Trabelsi, 2016; Nyberg, 2018). A large amount of
empirical research work exists which supports this statement (Baharumshah & Liew,
2006; Clements & Krolzig, 1998; Crawford & Fratantoni, 2003; Moolman, 2004;
Sarantis, 2001; Singh, 2012; Teräsvirta et al., 2005; Wai et al., 2015). For example, it
is found that variables have a much harsher reaction to cyclical contractions relative
to a cyclical upturn, showing that asymmetries do exist (Balcilan, Gupta, & Miller,
2015; Botha et al., 2006; Moolman, 2004).
By assuming cyclical symmetry when forecasting, forecasting accuracy might
be suboptimal, leading to the need for non-linear models as a means to forecast
economic cycles (Botha et al., 2006; Moolman, 2004; Nyberg, 2018). Bouali et al.
(2016) stated that non-linear models used for economic cycle modelling typically
allow regime changes and are therefore capable of accommodating relational
asymmetries across cyclical regimes. Non-linear models employed to capture such
asymmetries include Markov regime-switching (MRS) models and a range of
smooth transition autoregressive (STAR) models (Teräsvirta et al., 2005). Provided
the range of possible models that can be used as a means to forecast economic
cycles, it is of interest to identify an optimal forecasting model and have been the
focal point of several empirical studies.
Within this strand of research, the forecasting performance of various models
forecasting a range of different variables have been conducted. Studies range from
forecasting broad-based economic conditions such as business cycles to forecasting
specific variables such as oil, house prices, currencies, and equity prices. A study
conducted by Clements and Krolzig (1998) is one of the first studies set out
to comprehensively identify an optimal forecasting method for business cycles.

Clements and Krolzig (1998) considered the forecasting ability of the Markov
Regime-Switching Autoregressive model (MS-AR), the Smooth Transition Autore-
gressive (STAR) model and several traditional linear models at forecasting the US
business cycle. Out of the two non-linear models, Clements and Krolzig (1998)
found that the MS-AR model, encompassing of three different regimes and four
lagged autoregressive terms generally outperforms the SETAR model in estimating
key elements of the US business cycle. They further found that both the MS and
STAR models outperform linear models such as the popular autoregressive moving
average (ARMA) model. This finding concurs with the findings by researchers such
as Wai et al. (2015), Crawford and Fratantoni (2003) and Sarantis (2001).
Nyberg (2018) compared the forecasting ability of the non-linear Markov
Switching model to that of the linear Vector Autoregressive model and found
that the non-linear Markov Switching model is superior at forecasting both the
US business cycle and US interest rates. The study by Li et al. (2005) addressed
the same, however, focusing on not only industrialized economies but also on
newly industrialized economies and developing economies. They considered the
performance of Markov-switching models in modelling the business cycles of the
USA, Japan, Taiwan, South-Korea, Malaysia and Indonesia. Li et al. (2005) found
that the MS model sufficiently captures the growth and contraction periods in the
business cycles of the industrialized and developing countries’ business cycles.
Contrary to this finding though, they found that the implemented MS model does
not sufficiently capture the business cycle growth and contraction regimes of the
newly industrialized countries that they analysed.
Li et al. (2005) argue that the shift to industrialization for these countries caused
structural breaks, resulting in the ineffectiveness of the MS model in identifying
business cycle regime shifts. Li et al. (2005) therefore adjusted for structural breaks
by dividing the business cycles into two distinct periods, a pre-industrialized period
and a post-industrialized period. They found evidence that an MS two-regime
two AR lag approach effectively identifies growth and contraction periods in the
business cycle of the newly industrialized countries under analysis. Teräsvirta et
al. (2005) compared the forecasting performance of linear autoregressive models
and the non-linear STAR model at forecasting a range of macroeconomic time
series. Teräsvirta et al. (2005) found evidence that the STAR model predominantly
outperforms linear autoregressive methodology. However, studies by Marcellino
(2005), Rech (2002) and Tkacz (2001) disagree with Teräsvirta et al. (2005),
generally found no clear evidence that the non-linear models perform better than
a linear autoregressive approach at forecasting economic variables.
Singh (2012) conducted a study that aims to determine whether non-linearities
exist in the economic growth cycles of OECD countries. Evidence of non-linearity
will indicate that non-linear models might be necessary to effectively model
economic growth rate cycles. Singh (2012) found evidence through employing a
range of STAR family models that the hypothesis of linearity in the economic
growth cycle of almost every country under analysis could be rejected, and
therefore, characteristics of non-linearities do exist in the economic growth cycles
6 M. C. de Wet
of these economies. This implies that non-linear models might be more accurate in
modelling economic growth cycles than linear models.
Baharumshah and Liew (2006) conducted a study, aiming to determine whether
the traditional AR model or Exponential Smooth Transition Autoregressive
(ESTAR) model best performs in modelling and forecasting the path of East
Asian currencies. In this study, they found that the non-linear parameters of each
currency pair were statistically significant, providing evidence that the long-run
equilibrium in all the Asian currency pairs under analysis follows a non-linear
path. Furthermore, they found that the residual variance ratio of the ESTAR model
applied to each currency pairs relative to the residual variance ratio of the AR
model that corresponds to that the ESTAR model is below one. This indicates
that for each currency pair, the ESTAR model renders a lower variance in the
residual and therefore the ESTAR model proved to result in lower forecasting errors
(Baharumshah & Liew, 2006).
Balcilan et al. (2015) analysed the modelling and forecasting performance of
the ESTAR and STAR non-linear models versus the linear AR model on US house
prices. They found that given a long-time horizon, non-linear models perform better
than linear models in point forecasting the underlying financial variable. Balcilan et
al.’s (2015) findings on forecasting short-term price moves do however not conform
to the findings above. However, Balcilan et al. (2015) found no evidence that non-
linear models perform better at forecasting house prices over a short-time horizon
relative to linear models. Balcilan et al. (2015) also found little evidence that the
non-linear models implemented in their study outperform the linear models when
it comes to density forecasting, regardless of the time horizons. This indicates that
the ability of the non-linear models to forecast the probability distribution of the
underlying financial variable, relative to linear models, is limited. In comparing the
modelling and forecasting performance of the two non-linear models, Balcilan et al.
(2015) found that the Logistic Smooth Transition Autoregressive model (LSTAR)
outperforms that of the ESTAR model.
Relating to the cyclical movements of US house prices, Crawford and Fratantoni
(2003) found that regime-switching models do better in depicting realized house
price patterns, relative to ARIMA and GARCH family models. They argued that
regime-switching models can effectively be utilized to create a cyclical framework
for historic house price time-series data because these models identify the turning
points, amplitude, and frequency of cyclical moves better. Yet, corresponding to the
findings by Balcilan et al. (2015), Crawford and Fratantoni (2003) found no clear
evidence that regime-switching models perform better in point forecasting US house
prices, relative to the linear ARIMA model.
Based on the contradicting findings in empirical literature considered, it is not
clear that non-linear models will necessarily outperform linear models at forecasting
economic variables. This is because some researchers found that non-linear models
outperform linear models, and other researchers found no such evidence. It is
thus not apparent that non-linear models will necessarily outperform linear models
at forecasting South African economic cycles. This necessitates research that
specifically focusses on South African economic cycles.
Extensive research has been done on the South African business cycle, for
example, the work by Laubscher (2019), Botha et al. (2006), Boshoff (2005) and
Moolman (2004). Moolman (2004) modelled the South African business cycles
through a Markov regime-switching model. Botha et al. (2006) added to the study
conducted by Moolman (2004), testing whether the South African business cycle is
best estimated and forecasted through linear or non-linear models. Du Plessis (2004)
considered the South African Business cycle and how dependent this cycle is on its
own duration.
The study by Botha et al. (2006) contributes to the debate of whether linear
or non-linear models perform best in estimating business cycles. Moreover, by
focusing on the South African business cycle, the findings of this study are of
particular importance to this study. Botha et al. (2006) found that non-linear
models outperform linear models in forecasting the South African business cycle.
Furthermore, Botha et al. (2006) found that the ESTAR model is the most effective
model out of all the non-linear models to forecast the South African business cycle.
The findings by Moolman (2004) support the findings by Botha et al. (2006).
Based on the mean absolute percentage error (MAPE) statistic and the square
root of the mean squared error (RMSE) statistic, Moolman (2004) concluded that
the Markov regime-switching model performed much better than the linear AR(4)
model in terms of turning point prediction accuracy. The findings by Botha et al.
(2006) and Moolman (2004) are insightful because the findings in the broader body
of literature are inconclusive on whether linear or non-linear models perform best
at forecasting business cycles. This indicates that non-linear models perform best
in the South African context. Boshoff (2005) touched on the topic of South African
financial cycles by estimating how well these variables aided as leading indicators
for the South African business cycle. However, this study did not go through the
process of determining the optimal variables to include in the aggregate South
African financial cycle and chosen a few ad hoc financial variables to represent
the South African financial cycle. Furthermore, the study by Boshoff (2005) did not
forecast the South African financial cycle and only used the cycle to predict the
business cycle.
Very little to no research work has been done in an attempt to accurately forecast
an aggregate South African financial cycle through different methods and thereby
comparing the performance of the range of available forecasting methods to forecast
the aggregate South African financial cycle. Given the proven role that changes
in aggregate financial conditions have on the future economic path, timely and
accurately forecasting cyclical fluctuations in financial conditions are essential to
policymakers. Considering the large number of forecasting methods available in
the literature, research on determining optimal ways to forecast a methodically
constructed aggregate South African financial cycle will aid policymakers to better
estimate future cyclical fluctuations in aggregate South African financial conditions.
This research will attempt to address the research gap by comparing the forecasting
performance of an optimally estimated linear ARIMA model to the forecasting
performance of the non-linear MS-AR and STAR models at forecast aggregate
South African financial cycles over different forecasting periods.
8 M. C. de Wet
3 Data Description and Methodology
This study will utilize the aggregate South African financial cycle constructed by
de Wet (2020), and the aggregate financial cycle constructed by de Wet (2020)
will be used as the aggregate South African financial cycle in this study. The
cyclical measure constructed by de Wet (2020) consists of 59 variables which in
turn reflect 7 major financial components. The financial components reflected by
this measure are South African credit conditions, South African property market
conditions, South African interest rate conditions, balance sheet conditions of the
South African financial sector, South African equity market conditions, South
African economic confidence levels, and South African foreign financial positions.
The aggregate South African financial measure, to be forecasted in this paper, is thus
a single aggregate measure that reflects the cyclical movement of seven key South
African financial components. de Wet (2020) made use of a principal component
analysis and a dynamic factor model to aggregate 59 variables into a single measure.
Furthermore, de Wet (2020) employed a Christiano Fitzgerald filter as a cyclical
extraction method. The aggregate South African financial cycle typically expands
as credit levels and asset prices increase (de Wet, 2020). Furthermore, the aggregate
South African financial cycle typically expands due to an aggregate bank balance
sheet expansion but contracts due to increase in interest rate (de Wet, 2020). This
measure ranges from January 1975 to January 2017, and the data frequency is
monthly. de Wet (2020) implemented a Dynamic Factor model to construct a single
aggregate South African financial conditions index and made use of a Christiano
Fitzgerald bandpass filter to extract the cyclical component from the aggregate
conditions index to provide an aggregate South African financial cycle measure.
The aggregate South African financial cycle from 1975 to 2017 is depicted in
Fig. 1. The cyclicality over time is clear, and the cyclical measure provides a smooth
representation of the cyclicality in aggregate South African financial conditions over
time.
A number of models will be used to forecast the aggregate South African
financial cycle. The forecasting performance of each model will be compared to
determine the most accurate model to forecast the aggregate South African financial
cycle, provided varying forecasting timeframes. As done by a number of researchers
such as Botha et al. (2006), Teräsvirta et al. (2005), Moolman (2004) Sarantis (2001)
and Clements and Krolzig (1998), the forecasting performance of the linear ARIMA
model will be used as a benchmark. The aggregate South African financial cycle will
then be forecasted with the non-linear MS-AR model estimated to achieve objective
three. In addition to the non-linear MS model, the aggregate South African financial
cycle will be forecasted with an optimal STAR family model. The forecasting
results of these non-linear models will be compared to that of the ARIMA model
to determine whether accounting for non-linearities improves the performance of
forecasting aggregate South African financial cycles.
A fixed window rolling forecasting approach will be followed, and the study will
consider the performance of each model to forecast the aggregate South African
4
3
Cyclical magnitude
2
1
0
-1
-2
-3
-4
1975 1980 1985 1990 1995 2000 2005 2010 2015
Time (years)
Source: de Wet (2020)
Fig. 1 The aggregate South African financial cycle. Source: de Wet (2020)
financial cycle over different time horizons. According to Clark and McCracken
(2009), a fixed window rolling forecasting approach is an approach that uses a
fixed estimation sample size of a time series to forecast a continuum of a fixed n-
step ahead forecasts over time. The alternative to a fixed window rolling forecast
is a recursive forecasting approach (Clark & McCracken, 2009). With such a
forecasting approach, the estimation sample is heterogenic over time and grows
as time progresses. The argument against such a forecasting approach is that the
data points in the estimation sample can become irrelevant and redundant as the
estimation sample grows (Clark & McCracken, 2009). The heterogenic forecasting
sample also hinders the ability to compare the forecasting results of various models
and various timeframes. This motivates why a fixed window rolling forecasting
approach will be adopted in this study.
The consensus in the literature is to use a third of the total number of observations
in a time series as an estimation sample, leaving two-thirds of the total series to
forecast (Clark & McCracken, 2009). The estimation outputs will thus be based
on a third of the full data set. This forecasting process is best explained by the
hand of an example. Assume a time series consists of 105 monthly closing price
observations, dating from 31 January 2010 to 31 October 2018, and a 4-step ahead
forecast is conducted. The fixed estimation sample will consist of 35 observations,
thus approximately 2 years and 11 months. The estimation period for the first 4-
step ahead forecasted point will range from 31 January 2010 to 31 December 2012.
Thus, the model under consideration will be estimated with data points ranging from
31 January 2010 to 31 December 2012. The 4-step ahead forecasted data point will
represent a forecasted data point for 30 April 2013. The model under consideration
will then be re-estimated for the next 4-step ahead forecasted data point with the
estimation period ranging from 28 February 2010 to 31 January 2013. The 4-step
ahead forecasted data point will represent a forecasted data point for 31 May 2013.
10 M. C. de Wet
Note how the estimation sample size remains 35 months, and the forecasted data
points remain 4-step ahead forecasted values.
This process will be repeated, and a 4-step ahead forecasted data point for each
month up to 31 October 2018 will be obtained. This will result in a continuous series
with data points that are forecasted four-steps ahead. In this study, fixed window
rolling forecasts with ARIMA, MS-AR and STAR models will be done 1-step
ahead, 3-steps ahead, 6-steps ahead, 12-steps ahead, 18-steps ahead and 24-steps
ahead. The forecasting performance of each model with different forecasting time
horizons will be analysed and compared. This will indicate which model performed
best at forecasting the aggregate South African financial cycle and whether different
models perform better at forecasting different forecasting time frames.
3.1 ARIMA Methodology
The autoregressive integrated moving average (ARIMA) model where AR refers to

autoregressive terms, I refer to the level of integration of a given variable, and MA
the moving average of a given variable which measures the stochastic white noise
error of the model as an amalgamation of previous errors. The ARIMA model is a
very well-known statistical method and widely used in literature. An ARIMA (p, d,
q) indicates that p number of autoregressive should be included in the model, the
variables need to be differenced d amount of times for the variable to be stationary
and q number of moving average terms needs to be included in the model (Brooks,
2019). The ARIMA model, where the variable has been differenced d amount of
times to be stationary, can be written in the following linear equation according to
Brooks (2019):
ASAFCt = c + ∅1 ASAFCt−1 + ∅p ASAFCt−p + β1 μt + βq μt−q (1)
where ASAFCt is the dependent variable at time t, c represents the intercept of the
model, ∅p is the coefficients of the various autoregressive terms of the dependent
variable ASAFCt , and β q represents the coefficients of the various moving average
term μt .
According to Gujarati and Porter (2009), a one-period ahead forecast of the
dependent variable ASAFCt can be forecasted with the ARIMA models depicted
in (1) as follows:
ASAFCt+1 = c + ∅1 ASAFCt + ∅p ASAFCt−p + β1 μt + βq μt−q (2)
To determine I, the integration level of dependent variable Yt , a Dickey-Fuller

unit root will be conducted to determine at which level variable Yt is stationary
as suggested by Gujarati and Porter (2009). Furthermore, as suggested by Gujarati
and Porter (2009), the optimum number of autoregressive terms to include in the
model will be done by making use of the partial autocorrelation function (PACF).
This function indicates the partial correlation of the dependent variable with its own
lags by controlling lag values of relatively shorter lags when considering relatively
longer lags (Gujarati & Porter, 2009). The optimal amount of moving average
terms to be included in the model will be determined through the autocorrelation
function (ACF), which differs from the PACF by not controlling for relatively
shorter lags when considering longer lags (Gujarati & Porter, 2009). These measures
will indicate how many AR terms and MA terms to include to estimate an optimal
ARMA model. However, Gujarati and Porter (2009) state that conclusions based on
these measures can be subjective and therefore suggested additional measures such
as the Akaike Information Criterion (AIC), Schwartz Criterion (SC) and Hannan
Quinn Criterion (HQC) to determine the optimal ARMA model. Henceforth, in
addition to ACF and PACF, the AIC, SC and HQC will be used to determine the
optimal ARMA model.
3.2 Non-linear Models
In this section, a methodological outline will be provided for both the MS-AR
method and the STAR method to be employed in this study. These models make
it posable for autoregressive parameters in a model to change over time (Botha et
al., 2006).
3.2.1 MS-AR Models
In this study, four variants of the MS-AR model will be considered with various lag-
lengths. The variations are an MS-AR model with a fixed mean and fixed variance,
an MSM-AR model with a regime-dependent mean and fixed variance, an MSV-AR
model with a fixed mean and regime-dependent variance and an MSMV-AR model
with a regime-dependent mean and regime-dependent variance. Two extensions
to the STAR model will be considered in this study, namely the logistic smooth
autoregressive (LSTAR) model and an exponential transition function, which will
result in the estimation of an exponential smooth autoregressive (ESTAR) model.
Both these extensions will be considered, and the optimal version will be used to
forecast aggregate South African financial cycles. An optimal MS-AR model to
estimate the aggregate South African financial cycle will be identified based on
the Akaike Information Criterion (AIC), Schwartz Information Criterion (SIC) and
Hannan Quinn Criterion (HQC). The model with the lowest information criterion
value will be selected as the optimal model, and further analysis will be based on
the results rendered by the optimal model (Brooks, 2019). This selection approach
is similar to the selection approach followed by Tastan and Yildirim (2008).
Furthermore, it will be assumed that the aggregate South African financial cycle
has two states, namely an expansion and a contraction.
12 M. C. de Wet
The MS-AR model with a fixed mean and fixed variance is specified as follows:
yt = βs1 (yt−1 + yt−2 + · · · + yt−k ) + βs2 (yt−1 + yt−2 + · · · + yt−k ) + εt

(3)
where, st ∈ {1, 2} signifies the regime state under consideration, i.e. state one and
two, k signifies the optimal lag length, εt is a non-state-dependent error term and xt
is a vector of explanatory variables. Equation (3) can be restated to accommodate for
a regime-switching mean and in this setting can be re-specified as follows (Tastan
& Yildirim, 2008):
yt = cts + βs1 (yt−1 + yt−2 + · · · + yt−k ) + βs2 (yt−1 + yt−2 + · · · + yt−k ) + εt

(4)
where Cts is a state-dependent, s, intercept, allowing for a state-dependent mean.

Lastly, (3) can be restated to accommodate for a regime-switching mean and a
regime-switching variance and in this setting can be re-specified as follows:
yt − μst = cts + βs1 (yt−1 + yt−2 + · · · + yt−k − μst−1 ) +

βs2 (yt−1 + yt−2 + · · · + yt−k − μst−2 ) + εt (5)
Assuming that St is a first-order Markov process meaning that the current regime
is a function of the preceding regime St − 1 , then the transition probabilities of
progressing from one regime to another regime can be stated as follows (Tastan
& Yildirim, 2008):

n
pij = Pr (St = j |St−1 = i) , pij = 1, ∀i, j ∈ {1, 2, . . . , n) (6)
j =1
Thus for a cycle that exhibits two states, an expansion and a contraction, where
St = {1, 2}, respectively, the transition matrix is as follows (Tastan & Yildirim,
2008):

p11 p12
P = (7)
p21 p22
where each entry, p11 depicts the conditional probability of remaining in an expan-
sion once in an expansion, p12 depicts the conditional probability of moving from an
expansion to a contraction, p21 depicts the conditional probability of moving from a
contraction to an expansion and p22 depicts the conditional probability of remaining

in a contraction once in a contraction.
3.2.2 STAR Models
Following Teräsvirta et al. (2005), the STAR model is specified as follows:

st = β0 + β’1 wt + ∅0 + ∅1 wt ∂ (st−d ) + ε (8)

where wt = (1, st − 1 , . . . , st − k ) , consisting of k lags of the aggregate South
African financial cycle, ∂ is a transition function and st − d is the transition
variable and d is the delay parameter. Furthermore, ∅1 = (∅1 , ∅2 , . . . , ∅p )’ and

β 1 = (β 1 , β 2 , . . . , β k ) are parameter vectors. The transition function can be normal,
logistic or exponential (Sarantis, 2001). A normal transition function will result
in the estimation of a standard STAR model, a logistic transition function will
result in the estimation of a logistic smooth autoregressive (LSTAR) model and an
exponential transition function will result in the estimation of an exponential smooth
autoregressive (ESTAR) model.
Modelling a STAR model requires three procedures (Teräsvirta et al., 2005).
The first procedure is to estimate an autoregressive model and determine the
optimal number of autoregressive lags which will become k in (8). The second
procedure is to establish whether the variable under consideration exhibits non-
linear characteristics within a STAR set-up. If the variable under analysis exhibits
non-linear characteristics, the use of the non-linear STAR model to forecast such
variables will be justified (Sarantis, 2001). If the variable under analysis does
not exhibit non-linear characteristics, modelling and forecasting with a non-linear
model will be pointless and a linear model, such as an AR model, will be stuffiest.
Thirdly, a sequence of nested tests will be conducted to determine whether the
LSTAR model or the ESTAR model is optimal.
To carry out process two and three, the following auxiliary regressions will be
estimated as specified by Teräsvirta et al. (2005):
Vt = β0 + β1 wt + β2 wt st−d + β3 wt st−d

2
+ β4 wt st−d
3
+ μt (9)
where Vt is the residuals of the linear AR(4) model specified in (1). A range of d
values will be considered, and the axillary model will be reiterated for each value.
Sarantis (2001) suggested an integral of 1 d ≥ 6. The smooth threshold linearity
test will be conducted to determine whether the South African financial cycle has
non-linear characteristics.
The null hypothesis for the smooth threshold linearity test is as follows:
H0 : β2 = β3 = β4 = 0

14 M. C. de Wet
Rejecting the null hypothesis will indicate that the variable under analysis does
exhibit non-linear characteristics.
To establish whether the ESTAR model or the LSTAR model is optimum, the
Terasvirta sequential test will be conducted as suggested by Teräsvirta et al. (2005).
The null hypotheses for this test are as follows:
H0 : β3 = 0
H0 : β2 = 0 | β3 = 0
H0 : β1 = 0 | β3 = β2 = 0
The selection rule states that if H0 : β 1 = 0 β 3 = β 2 = 0 has the smallest p-

value, then an ESTAR model should be used. If any of the other null hypotheses
have the lowest p-value, then an LSTAR model should be estimated. Furthermore,
the optimum lag number for d will be established based on the d with the lowest
p-value, thus the most significant d.
Estimation of the STAR, LSTAR and ESTAR models will provide two sets of
beta coefficients for each threshold variable (Teräsvirta et al., 2005). The first set
of coefficients will indicate the relationship between a given threshold variable and
the aggregate South African financial cycle during linear periods in the aggregate
financial cycle. The second set of coefficients will indicate the relationship between
a given threshold variable and the aggregate South African financial cycle during
non-linear periods in the aggregate financial cycle (Teräsvirta et al., 2005). Linear
periods refer to consecutive periods in the aggregate South African financial cycle
where no cyclical regime change occurred, for example, a pivot from an expansion
to a contraction phase. On the other hand, non-linear periods refer to periods
where the aggregate South African financial cycle series pivoted from one cyclical
regime to another, for example moving from an expanding to a contracting regime
(Teräsvirta et al., 2005). Thus, the set of beta coefficients for threshold variables
during non-linear periods indicate the relational dynamics between the aggregate
South African financial cycle and a corresponding threshold variable during a period
where a cyclical change took place.
LSTAR
The LSTAR model allows asymmetrical adjustments to the non-linear process.

Therefore, if non-linear shifts in the aggregate South African financial cycle does
not occur symmetrically during different regimes, then the LSTAR model will be
more effective in forecasting turning points in the aggregate South African financial
cycle (Teräsvirta et al., 2005). Teräsvirta et al. (2005) state that the LSTAR model
follows the following form:

−1

K
∂ (st−d ) = 1 + exp −γ (st−d − ck ) , (10)
k=1
γ > 0, c1 ≤ · · · ≤ cK
where γ measures the speed of moving from one regime to the other. Teräsvirta et
al. (2005) write that the most common value for k in the transition function γ > 0,
c1 ≤ . . . ≤ cK is k = 1. Teräsvirta et al. (2005) explain that if k = 1, then parameters
∅ + λG(st − d, h ; γ , c) change monotonically from ∅ to ∅ + λ meaning that as λ
converge to zero, the LSTAR model develops into a linear AR model and becomes
a two-regime TAR model if the closer c1 converges to 1.
ESTAR
According to Enders (2004), the ESTAR model is symmetrical if ASAFCt − 1 = c,

allowing the model to approximate gravitational attraction, making the model
optimal if the series depicts various levels of autoregressive decay at cyclical
pivot points. Enders (2004) states that the STAR model can be transformed to an
exponential form by making

γ = 1 + exp( − s(st−0 − c)2 y>0 (11)
Since λ is constant, movements of γ towards 0 or ∞ make the ESTAR model a

AR(p) process, whereas divergence of λ from 0 or ∞ makes the process non-linear.
3.3 Determining Forecasting Performance
To determine which model performs the best at forecasting the aggregate South
African financial cycle, five information criteria will be used, namely root mean
square error (RMSE), mean absolute error (MAE), the mean absolute percentage
error (MAPE) and Theil’s U statistic. These performance measures are often used
in literature, such as the work by Wai et al. (2015), Nyberg (2018), Baharumshah
and Liew (2006), Botha et al. (2006) and Moolman (2004), as a means to determine
the forecasting performance of models. It is argued, however, that forecasting
performance measures should be used in combination to get a consensus view,
and not in isolation. This will increase the validity of one’s findings, hence all five
16 M. C. de Wet
measures will be used. The formulas for each measure are as follows, as seen in
Brooks (2019):

T
1 2
RMSE = yt,s − ft,s , (12)
n
t=T1
where yt, s is the actual value at time t and ft, s is the forecasted value at time t.
Furthermore, n represents the total number of observations in the time series.
T
100 y − ft,s
MAPE = Y , (13)
n t,s
t=T1

n−1 ft,s −yt,s 2
t=1
Theil s U1 statistic =
y t−1
2 (14)
n−1 ft,n −yt,s
t=1 yt−1
where yt − 1 is the actual value one period prior to the period under consideration
and Ft, n represents the naïve forecasted value.
Given that RMSE and MAPE indicate the error of a given forecasting process, the
lower the values generated by RMSE and MAPE, the better the forecasting accuracy
(Brooks, 2019). The average of each measure over time will be considered. The
Theil’s U statistic provides a slightly different measure than the other four measures
considered in this study. It indicates whether the forecasting model performs better
than a naïve forecasting approach. A Theil’s U coefficient smaller than one indicates
that the errors rendered by the forecasting model are lower than that of a naïve
forecasting approach and are thus superior to a naïve forecasting approach (Brooks,
2019). On the other hand, if the Theil’s U coefficient is larger than one, then a
naïve forecasting approach outperforms the forecasting ability of the forecasting
model under consideration (Brooks, 2019). The Theil’s U statistic will therefore
not be used to compare the various forecasting models to each other, but rather
to determine whether the model under consideration is more effective than using
a naïve forecasting approach. Provided that a rolling forecasting approach will be
taken for the various n-ahead forecasting time horizons, the average of the various
forecasting performance measures over time, for a given forecasting horizon, will
be considered.
Table 1 Phillip-Perron unit Breakpoint Augmented Dickey-Fuller test results

root test and the Breakpoint
T-statistic
Augmented Dickey-Fuller
unit root test results Augmented Dickey-Fuller test statistic −8.519
Test critical value at a 99% level −3.445
Phillips-Perron test results
T-statistic
Phillips-Perron test statistic −4.269
Source:Author’s calculation
4 Results, Findings, and Discussion
Firstly, the results rendered by the ARIMA model will be considered, followed by
the results rendered by the STAR model. Then the results from the MS-AR model
will be considered, followed by the forecast performance evaluation.
4.1 ARIMA Model Outputs
First, the order of integration, I, of the aggregate South African financial cycle will
be established. Research has shown that the standard Augmented Dickey-Fuller unit
root test is often sub-par when working with a time series that exhibits cycles and
regime-switching properties (Nelson, Piger, & Zivot, 2000). Nelson et al. (2000)
suggest using the Phillip-Perron unit root test or a breakpoint Augmented Dickey-
Fuller unit root test which allows for endogenous probabilistic trend fluctuations in
a series when testing a cyclical series for stationarity. Therefore, the Phillip-Perron
unit root test and the Breakpoint Augmented Dickey-Fuller unit root test will be
used to test the level of integration of the aggregate South African financial cycle.
Table 1 depicts the results rendered by these tests. These tests indicate whether the
aggregate South African financial cycle is stationary and if not, how many times
the series needs to be differenced to be stationary. This will indicate the level of
integration (I).
In absolute terms, both the Breakpoint Augmented Dickey-Fuller test statistic
and the Phillips-Perron test statistic are larger than the critical value at a 99%
confidence level. Thus, the null hypothesis of a unit root can be rejected, and it could
be concluded that the aggregate South African financial cycle is stationary at level.
The order of integration (I) is thus 0, and the series does not need to be differenced.
Given that the I in the ARIMA model is now established, the optimal number of AR
18 M. C. de Wet
Table 2 ACF and PACF for the aggregate South African financial cycle series
Autocorrelation Partial correlation Number of lags AC PAC Prob
.|***** .|***** 1 0.916 0.986 0.000
.|*** ***|. 2 0.820 −0.771 0.000
.|**** .|*** 3 0.871 0.767 0.000
.|*** **|. 4 0.822 −0.698 0.000
.|. | .|. | 5 0.113 0.055 0.000
.|. | .|. | 6 0.045 0.046 0.000
.|. | .|. | 7 0.030 0.037 0.000
.|. | .|. | 8 0.040 0.036 0.000
.|. | .|. | 9 0.006 0.013 0.000
.|. | .|. | 10 0.020 0.003 0.000
and MA terms must now be determined. A correlogram will be used to display the
ACF and PACF of the aggregate South African financial cycle series. The rule of
thumb is that the ACF and the PACF should die down to zero if the time series is
stationary. Furthermore, spikes in the ACF on the correlogram indicates the optimal
MA specification and spikes in the PACF on the correlogram indicates the optimal
AR specification. Table 2 depicts ACF and PACF outputs and the corresponding
correlogram.
Based on the correlogram depicted in Table 2, both the ACF and PACF die
down to zero fairly quickly, indicating that the aggregate South African financial
cycle series is stationary. This corresponds with the results rendered by the ADF
and PP unit root tests. Based on the correlogram depicted in Table 2, the ACF
function spikes at the first four lags and then dies out after the first three lags.
Furthermore, the PACF spikes up to four lags and then dies down. This indicates
that an AR(4)MA(4) specification will be optimal. Table 3 depicts the AR(4)MA(4)
model outputs and based on these outputs, it can be seen that all the AR and MA
terms are significant at a 99% confidence level.
The model depicted in Table 3 has an adjusted R-squared of 0.851, meaning
that the explanatory variables in the model explained 85.1% of the change in the
aggregate South African financial cycle. Given this high explanatory power, the
AR(4)MA(4) model will be used to forecast the aggregate South African financial
cycle, and the forecasting performance of this model will be assessed. As done
by a number of researchers such as Botha et al. (2006), Teräsvirta et al. (2005),
Moolman (2004) Sarantis (2001) and Clements and Krolzig (1998), the forecasting
performance of the ARMA model will be used as a benchmark. The forecasting
performance of non-linear models will be compared to that of the ARMA model
to determine whether accounting for non-linearities improves the performance of
forecasting the aggregate South African financial cycle.
Table 3 ARIMA results Variable Coefficient P-value

C 0.062 0.607
AR (1) 3.909 0.000***
AR (2) 4.271 0.000***
AR (3) −3.834 0.000***
AR (4) −0.962 0.000***
MA (1) 1.086 0.000***
MA (2) −0.167 0.001***
MA (3) −0.540 0.000***
MA(4) 0.092 0.000***
Adjusted R-squared: 0.851
*, ** and *** denote statistical significance at a 99%,
95% and 99% confidence level, respectively, based on
p-values
Table 4 Outputs rendered by Coefficient P-value

the STAR model
Variables during the linear phase
AR(1) 0.998 0.000***
AR(2) 0.942 0.009***
AR(3) −1.081 0.000***
AR(4) −0.713 0.001***
Variables during non-linear phase
AR(1) −0.727 0.021**
AR(2) −0.923 0.011**
AR(3) 0.343 0.027**
AR(4) −0.161 0.033**
Non-threshold variable
C −0.004 0.013**
Threshold: 2.471 and P-value of threshold: 0.000***
*, ** and *** denote statistical significance at a 99%,
95% and 99% confidence level, respectively, based on
p-values
4.2 STAR Model Outputs
The results in the previous section indicated that four AR lag terms are optimal
and therefore the base STAR(n) model will be a STAR(n) model with four lags,
STAR(n). The results for the standard STAR(4) are presented in Table 4. The top
part of the table depicts the coefficients of each AR term exhibited during linear
periods in aggregate South African financial cycles. Based on the P-values of each
AR term, all four AR terms are statistically significant.
20 M. C. de Wet
Table 5 Smooth threshold Null hypothesis P-value

linearity test results
H04: b1 = b2 = b3 = b4 = 0 0.000***
H03: b1 = b2 = b3 = 0 0.005***
H02: b1 = b2 = 0 0.009***
H01: b1 = 0 0.002**
*, ** and *** denote statistical significance
at a 99%, 95% and 99% confidence level,
respectively, based on p-values
The middle part of the table depicts the coefficients of each AR term exhibited
during non-linear periods in aggregate South African financial cycles. Based on
the P-values of each AR term, all four AR terms are statistically significant
during non-linear periods. The lower part of the table depicts the coefficient of the
non-threshold variable, the transition threshold value, and the adjusted R-squared.
The threshold value is 2.471, indicating that the probability of a cyclical change
increases significantly when the cycle reaches the 2.471 level. Also, the adjusted R-
squared of 0.906 indicates that 90.6% of the variance in the aggregate South African
financial cycle is explained by the variables in the model. This is an improvement in
the linear ARIMA model which had an adjusted R-squared of 85.1%. This indicates
that the consideration of non-linearity improves the explanatory power of a model.
From this STAR(4) model, a smooth threshold linearity test is conducted within
the STAR(4) model set-up to determine whether aggregate South African financial
cycles exhibit non-linear characteristics. Furthermore, a Terasvirta sequential test
is conducted, as suggested by Teräsvirta et al. (2005), to determine whether the
transition function is a normal, logistic or exponential. If the transition function
is normal, then the STAR model is the optimal smooth transition model; if the
transition function is logistic, then the LSTAR model is the optimal smooth
transition model and if the transition function is exponential, then the ESTAR model
is the optimal smooth transition model. Once this has been determined, the P-values
for a range of delay factors, estimated as part of the linearity test, are considered to
determine the optimal d in (8) and (9). These tests will aid in selecting the optimal
smooth transition model, which in turn will ultimately be used to forecast aggregate
South African financial cycles. Table 5 depicts the results rendered by the smooth
threshold linearity test.
All four hypotheses in Table 5 can be rejected at a 99% confidence interval. The
2 and w s 3 ,
results in Table 5, therefore, indicate that the beta coefficients of wt st−d t t−d
the two non-linear measures in the auxiliary regression, represented by (9), are
highly significant (Teräsvirta et al., 2005). The aggregate South African financial
cycle, therefore, does exhibit non-linear characteristics, making it appropriate to
model the aggregate South African financial cycle with the STAR methodology.
Table 6 represents the results rendered by the Terasvirta sequential tests.
Provided that H2: b2 = 0 | b3 = 0 is significant at a 99% confidence level, as
depicted in Table 6, and has a lower p-value than H1: b1 = 0 | b2 = b3 = 0, a
Table 6 Terasvirta Null hypothesis P-value

sequential test results
H3: b3 = 0 0.035**
H2: b2 = 0 | b3 = 0 0.000***
H1: b1 = 0 | b2 = b3 = 0 0.009***
*, ** and *** denote statistical signifi-
cance at a 99%, 95% and 99% confidence
level, respectively, based on p-values
Table 7 P-values for the d lag P-value

range of delayed factors
considered in this study based 1 0.046**
on linearity test 2 0.003***
3 0.018**
4 0.025***
5 0.028**
6 0.037**
*, ** and *** denote statistical signif-
icance at a 99%, 95% and 99% con-
fidence level, respectively, based on p-
values
logistic transition function is optimum. The aggregate South African financial cycle
will thus be modelled and forecasted by the LSTAR model. Finally, Table 7 depicts
the P-values of a range of delay factors derived from the linearity test.
Based on the results in Table 7, d = 2 is the most significant given that d = 2
has the lowest p-value. The delay factor for the STAR model in this study will thus
consist of two lags. Given the results considered, one now knows that there are
non-linearities in the aggregate South African financial cycle and that the transition
function exhibits logistic characteristics. Furthermore, the optimum d in (8) and (9)
is established. This allows for the estimation of an optimal smooth transition model
which is an LSTAR(4) model with a two-lag delay factor. Table 8 depicts the results
estimated by the LSTAR(4) model.
All the threshold variables during a linear period in the aggregate financial cycle
are significant at a 99% confidence level, provided that each variable exhibited a p-
value smaller than 0.01. The beta coefficients indicate that, during a linear period, a
one unit increase in the aggregate South African financial cycle one, two, three and
four periods back will lead to a 0.878, 0.599, −0.757, −0.640 unit change in the
current value of the aggregate South African financial cycle, respectively. Thus, an
increase in the aggregate South African financial cycle in time t1 will typically have
a positive impact on the aggregate South African financial cycle in the following
two periods but then have a negative impact three and four periods ahead.
During a non-linear period, a one unit increase in the aggregate South African
financial cycle one, two, three and four periods back will lead to a −0.421, −0.337,
0.248 and −0.454 unit change in the current value of the aggregate South African
22 M. C. de Wet
Table 8 Outputs rendered by the LSTAR model

Coefficient P-value
Variables during the linear phase
AR(1) 0.878 0.000***
AR(2) 0.599 0.000***
AR(3) −0.757 0.000***
AR(4) −0.640 0.000***
Variables during non-linear phase
AR(1) −0.421 0.020**
AR(2) −0.337 0.042**
AR(3) 0.248 0.030**
AR(4) −0.454 0.022**
Non-threshold variable
C −0.006 0.014**
Absolute threshold value: 2.786 and P-value of threshold: 0.000***
*, ** and *** denote statistical significance at a 99%, 95% and 99% confidence level, respectively,
based on p-values
financial cycle, respectively. This mostly indicates that an inverse relationship exists
between the aggregate South African financial cycle at time t1 and lags of itself,
except for the third AR lag term. The cyclical series is in a transition period during
a non-linear phase, thus an inverse relationship between the current period and the
preceding periods is expected. Consider now the threshold value and Adjusted R-
squared depicted in the bottom part of Table 8. The absolute threshold value is
2.786, indicating the typical level at which aggregate South African financial cycles
reach a pivot point. This indicates that the probability of a cyclical change increases
significantly when aggregate South African financial cycles reach the 2.786 or
−2.786 level. Also, the adjusted R-squared of 0.936 indicates that the threshold
variables in the model perform well in explaining movements in the aggregate South
African financial cycle.
4.3 MS-AR Model Outputs
The results from the various criterion for the various MS-AR-type models are
presented in Appendix. The HQC, AIC and SIC prove to be the lowest for the
MSMV(2)-AR(3) model. Thus, given that all the three information criteria are low-
est for the MSMV(2)-AR(3) model, the optimal specification to model the aggregate
South African financial cycle is an MS model with three AR lags, a regime-
dependent mean and a regime-dependent variance with two states. Hence, the results
of the MSMV(2)-AR(3) model will further be considered, and the MSMV(2)-AR(3)
Table 9 Estimation output Variable MSMV(2)-AR(3)

of the MSMV(2)-AR(3)
model μs1 0.099***
μs2 −0.162***
β 1s1 AR(1) 1.966***
β 2s1 AR(2) 1.162***
β 3s1 AR(3) −1.105***
β 1s2 AR(1) 2.063***
β 2s2 AR(2) 1.753***
β 3s2 AR(3) −0.986**
σ s1 −3.661***
σ s2 −5.787***
Transition matrix parameters
P11-C 2.974***
P21-C −3.198***
Typical duration (in months)
Expanding phase 49.31
Contracting phase 35.79
Transition probabilities
p11 0.951
p12 0.049
p22 0.891
p21 0.109
** and *** denote statistical significance
at a 95% and 99% confidence level,
respectively, based on p-values
model will be used to forecast the aggregate South African financial cycle. The
outputs from the MSMV(2)-AR(3) model are depicted in Table 9.
In the MSMV(2)-AR(3) model, the mean, μs , and variance, σ s , and cyclical
persistent terms, β 1s AR(1), β 2s AR(2) and β 3s AR(3), depend on the unobservable
Markov state variable that may assume two values, st ∈ {1, 2}. Firstly, consider
the results from the regime-dependent means, μs1 and μs2 . The regime-dependent
means of both regimes, μs1 and μs2 , are statistically significant at a 99% confidence
level and have opposite signs. Thus, the point estimates of the regime-dependent
means are statistically different from each other. This provides evidence that
supports the assumption that two distinct regimes characterize the aggregate South
African financial cycle. This justifies the use of an MSMV(2)-AR(3) model that
accounts for a regime-dependent mean.
The regime-dependent mean in regime 1, μs1 , is positive, and the regime-
dependent mean in regime 2, μs2 , is negative. Given that μs1 > μs2 , the evidence is
provided that one can interpret regime 1 as the expanding regime and regime 2 as
the contracting regime (Tastan & Yildirim, 2008). Secondly, consider the variance
parameter, σ s1 , and σ s2 . Both these parameters are statistically significant at a
99% confidence level with different magnitudes. In absolute terms σ s1 < σ s2 , as
stated by Tastan and Yildirim (2008), indicates that there is volatility asymmetry
24 M. C. de Wet
between regimes. These results indicate that volatility is lower during an expanding
phase relative to the volatility in a contracting phase. This result was expected and
corresponds to empirical literature providing evidence that cyclical contractions in
both financial conditions, i.e. the 2007 financial crisis, and real economic conditions,
i.e. business cycle contractions, are more violent and harsh relative to expansions
(Tastan & Yildirim, 2008; McQueen & Thorley, 1993). These asymmetries provide
additional justification for the use of non-linear MS-AR methodology that accounts
for asymmetries and accounts for a regime-dependent variance.
The transition matrix parameters, P11-C and P21-C, in Table 9 are both
statistically significant at a 99% confidence level and have opposite signs. The
positive P11-C and negative P21-C signifies that increases in the aggregate South
African financial cycle are associated with higher probabilities of remaining in the
expanding regime, lowering the transition probability out of regime 1 and increasing
the transition probability from regime 2 into regime 1. Furthermore, the results from
this model indicated that an aggregate South African financial cycle expansion lasts
approximately 49.31 months, thus 4 years and 1.31 months and a contraction last
approximately 35.79, thus 3 years. These results thus indicate that an expansion in
the aggregate South African financial cycle has a longer duration than a contraction.
The aggregate South African financial cycle thus exhibits a level of durational
asymmetry.
The various models employed to estimate the aggregate South African financial
cycle will now be used to forecast the aggregate South African financial cycle, and
the forecasting performance of the various models will be compared to identify the
optimal model to forecast the aggregate South African financial cycle.
4.4 Forecasting Performance Evaluation
In this section, the rolling forecasting performance of the linear AR(4)MA(4) model,
the LSTAR(4) model and the MSMV(2)-AR(3) model will be established and
compared. A fixed window rolling forecasts with each model will be done 1-step
ahead, 3-steps ahead, 6-steps ahead, 12-steps ahead, 18-steps ahead and 24-steps
ahead. The RMSE, MAPE and Theil U1 coefficient are considered to identify
the model with the best forecasting performance, given the different forecasting
horizons. Table 10 depicts the forecasting performance measures rendered by each
of the three models for the various forecasting time horizons.
Consider the results for a three-step and six-step forward forecasting horizon
in Table 10. These are the two shortest forecasting time horizons in this study,
and based on the RMSE and MAPE the linear ARIMA model produced the most
accurate forecasts for this time horizon. The benchmark ARMIA model thus out-
performs the non-linear models at forecasting short periods. This corresponds to the
findings by Balcilan et al. (2015) who found that non-linear models typically do not
outperform standard ARIMA models in forecasting short periods ahead. A possible
explanation for this can be that aggregate South African financial cycles exhibit
Table 10 Forecasting performance measures

RMSE MAPE Theil U1 coefficient
Three-steps forward
AR(4)MA(4) 7.86E-05a 0.070a 2.64E-05a
MSMV(2)-AR(3) 0.014 3.890 0.005
LSTAR(4) 0.010 3.366 0.004
Six-steps forward
AR(4)MA(4) 0.001a 0.116a 0.000a
MSMV(2)-AR(3) 0.027 6.943 0.009
LSTAR(4) 0.038 8.629 0.013
Twelve-steps forward
AR(4)MA(4) 0.312 44.634 0.104
MSMV(2)-AR(3) 0.109 19.027 0.012a
LSTAR(4) 0.064a 11.547a 0.037
Eighteen-steps forward
AR(4)MA(4) 0.315 45.978 0.105
MSMV(2)-AR(3) 0.046a 12.749a 0.020a
LSTAR(4) 0.297 43.968 0.101
Twenty-four-steps forward
AR(4)MA(4) 1.307 107.760 0.433
MSMV(2)-AR(3) 0.132a 15.730a 0.045a
LSTAR(4) 0.818 86.382 0.271
a Indicates the lowest measure and thus the model with the best forecasting performance
linearities over short periods. In other words, aggregate South African financial
cycles do not reach a cyclical turn every 3–6 months, thus not exhibiting non-
linearities. Therefore, by accounting for non-linearities does not improve forecasting
accuracy, as such non-linearities are seldom over short periods. Furthermore, the
simplicity of ARIMA modelling and forecasting can attribute to the forecasting
accuracy of such models (Balcilan et al., 2015; Crawford & Fratantoni, 2003). In
combination, the simplicity of ARIMA forecasting and the possible non-linearities
exhibited by aggregate South African financial cycles over short periods can explain
why the ARIMA model outperforms MS-AR and LSTAR models over a 3 and 6-
step forecasting horizon.
On the other hand, based on the RMSE and MAPE, both the non-linear
MSMV(2)-AR(3) and LSTAR(4) models produced more accurate forecasts for 12-,
18- and 24-steps ahead forecasting time horizon than the linear AR(4)MA(4) model.
Based on the RMSE and MAPE, the forecasting accuracy of the linear AR(4)MA(4)
model deteriorates drastically as the forecasting time horizon increases. The mean
absolute percentage error is as high as 107.760% for a 24-period ahead forecast,
indicating how inaccurate the AR(4)MA(4) model becomes at forecasting aggregate
South African financial cycles. This corresponds to the findings of a large number
of researchers such as, but not limited to, the work done by Wai et al. (2015),
Baharumshah and Liew (2006), Botha et al. (2006), Teräsvirta et al. (2005),
26 M. C. de Wet
Moolman (2004), Crawford and Fratantoni (2003) and Clements and Krolzig (1998)
who found evidence that forecasting gains can be generated by exploiting non-linear
structures offered by STAR and MS-AR models.
Forecasting 12-steps ahead, the LSTAR(4) model generated the most accurate
forecasts according to the RMSE and MAPE. The Theil U1 coefficient indicates that
the MSMV(2)-AR(3) model performs slightly better at forecasting aggregate South
African financial cycles 12-steps ahead. It might, therefore, be useful to use both the
LSTAR and the MSMV(2)-AR(3) models to forecast the aggregate South African
financial cycle 12-steps ahead. According to all three performance measures, the
MSMV(2)-AR(3) model outperforms the LSTAR (4) and AR(4)MA(4) models at
forecasting the aggregate South African financial cycle 18- and 24-steps ahead.
These are the longest forecasting time horizons considered in this study. This
shows that the MSMV(2)-AR(3) model renders the most accurate forecasts of the
aggregate South African financial cycle given a longer-term time horizon. This
corresponds to the work done by Clements and Krolzig (1998) who found evidence
that MS-AR models outperform STAR models at forecasting economic variables.
The Theil U1 coefficient indicates that the linear AR(4)MA(4) model as well as
the non-linear MSMV(2)-AR(3) and the LSTAR(4) models outperforms the naïve
forecasting approach over all time horizons.
5 Conclusion
The aim of this article was to identify the best model to forecast aggregate
South African financial cycles over various time periods, specifically distinguishing
between the forecasting performance of linear vs non-linear models. The forecasting
performance of the linear ARIMA model was used as a benchmark and the
forecasting performance of the LSTAR and MS-AR models was measured relative
to that of the ARIMA model. The RMSE, MAPE and Theil U coefficient were
used as forecasting performance measures because these measures are widely
accepted and used in forecasting literature to establish and compare the forecasting
performance of various models to one another.
The results rendered by the LSTAR model indicate that the threshold level of the
aggregate South African financial cycles is 2.891 in absolute terms. This indicates
that the aggregate South African financial cycle tends to reach a pivot point when it
reaches a level of 2.891 or −2.891. Therefore, the probability of a cyclical change
increases considerably when the aggregate South African financial cycle reaches
2.891 or −2.891. Furthermore, the results rendered by the smooth threshold linearity
test indicate that non-linearities are present in the aggregate South African financial
cycle series. This corresponds to the research done by Singh (2012). This indicates
that the modelling of aggregate South African financial cycles with linear models
might be suboptimal and that it might be necessary to account for non-linearities in
the modelling of aggregate South African financial cycles. It also indicates that the
use of non-linear models to forecast aggregate South African financial cycles might
improve forecasting accuracy. It was therefore expected that the non-linear MS-AR
and LSTAR models will outperform the benchmark ARIMA model.
Interestingly, evidence indicates that the linear AR(4)MA(4) model outperforms

the LSTAR(4) and MSMV(2)-AR(3) models at forecasting the aggregate South
African financial cycle three- and six-steps ahead. Thus, given a short forecasting
horizon, no forecasting gains are achieved by accounting for non-linearities.
However, for longer forecasting time horizons the non-linear MSMV(2)-AR(3) and
the LSTAR(4) models outperform the linear AR(4)MA(4) model. Thus, as the
forecasting time horizon increases, forecasting gains are achieved by exploiting
the non-linear structure of the LSTAR and MSMV-AR models. Furthermore,
evidence is found that the MSMV(2)-AR(3) model outperforms the LSTAR(4)
model at forecasting aggregate South African financial cycles 18- and 24-steps
ahead. Policymakers and other economic participants which are exposed to the
aggregate South African financial cycle should use the AR(4)MA(4) model to
forecast the aggregate South African financial cycle 3–6 months ahead. However,
the MSMV(2)-AR(3) model should be used to forecast the aggregate South African
financial 12–24 months ahead.
A.1 Appendix: Selection Criterion for Various MS-AR

Models
HQC AIC SIC

MS(2)-AR(1) −0.804 −0.823 −0.774
MS(2)-AR(2) −6.369 −6.395 −6.329
MS(2)-AR(3) −9.002 −9.034 −8.951
MS(2)-AR(4) −7.908 −7.947 −7.848
MSM(2)-AR(1) −1.724 −1.747 −1.689
MSM(2)-AR(2) −9.443 −9.478 −9.387
MSM(2)-AR(3) −8.442 −8.482 −8.377
MSM(2)-AR(4) −5.885 −5.914 −5.840
MSV(2)-AR(1) −1.207 −1.233 −1.167
MSV(2)-AR(2) −7.384 −7.422 −7.321
MSV(2)-AR(3) −9.384 −9.422 −9.323
MSV(2)-AR(4) −5.639 −5.671 −5.589
MSMV(2)-AR(1) −1.212 −1.234 −1.177
MSMV(2)-AR(2) −9.021 −9.057 −8.966
MSMV(2)-AR(3) −10.374a −10.448a −10.206a
MSMV(2)-AR(4) −5.546 −5.572 −5.506
a Optimal model based on criterion
28 M. C. de Wet
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From Clubs to Communities. From
Tourists to International Friends. Crisis
Legacy in Music Organizations
with Revenue Management
and Relationship Marketing
Angela Besana and Annamaria Esposito
Abstract The prompt and cost-effective segmentation of audiences and stakehold-

ers is, today, as essential as revenue diversification in US symphony orchestras and
opera houses.
The lack of resources was particularly heavy during crisis years and as from
2008. Fundraisers of these music organizations engaged both with clubs and
communities. At the same time, marketing officers explored new audiences and their
segmentation.
Relationship marketing was a pivotal strategy, in order to enhance stakeholders’
engagement and loyalty.
The crisis legacy allowed these organizations to survive with revenue manage-
ment and relationship marketing.
The purpose of this study is a profiling of a sample of 120 USA symphony
orchestras and opera houses, with different marketing and fundraising. Thanks to
a k-means cluster analysis of diversified revenues, expenses and gains from 2008 to
2015, the paper will separate this sample into two poles, according to average vari-
ations of economic performances and to the focus on relationship marketing in the
whole period. One pole grew as concerns relationships, revenue management and
diversification. The other pole was affected by diminishing intensity of marketing
and increasing fundraising and, as a consequence, retrenchment of some revenues
except for contributions. Relationship marketing was in this cluster supported by
volunteers. This pole profited by the highest increase in gains.
Keywords Economics · Marketing · Classical music · USA · Cluster analysis
A. Besana () · A. Esposito

Dipartimento di Business, Law, Economics and Consumer Behaviour Business, Diritto,
Economia e Consumi, International University of Languages and Media, Libera Università di
Lingue e Comunicazione IULM, Milan, Italy
e-mail: angela.besana@iulm.it; annamaria.esposito@iulm.it

https://doi.org/10.1007/978-3-030-63970-9_2
32 A. Besana and A. Esposito
1 Introduction
Since 2008, the beginning of the latest financial and real crisis, US symphony
orchestras and opera houses have struggled to survive in a very competitive scenario,
with revolutionary implications for their strategies. During the crisis, marketing and
fundraising have not always revealed themselves as efficient strategies in a very
uncertain climate. Revenues have been falling and revenue diversification has been
not easily implemented and it has been often eluded. Single ticket and group sales
have not fully compensated the drop of subscriptions (Besana, 2012; Besana &
Esposito, 2019; Pompe, Tamburri, & Munn, 2019; Voss, Voss, Yair, & Lega, 2016).
Besides, contributed and investment incomes have not easily recovered after years
of fluctuations.
As a consequence, orchestras and opera houses have been innovatively think-
ing about their marketing and fundraising, with attention to new segments and
stakeholders and with a different and versatile implementation thanks to social
media. Since these hard times, the audience development has concerned both
local communities and tourists on the marketing side (Besana & Esposito, 2019;
Poon & Lai, 2008). On the fundraising side, donors’ exploitation has not more
concerned clubs, corporations and grant-making foundations, and also national and
international friends (Cancellieri & Turrini, 2016; Kemp & Poole, 2016; Pompe &
Tamburi, 2016).
Orchestras and opera houses usually engage with their local communities thanks
to education and entertainment programmes: performances, musical activities,
rehearsals and concerts in offices halls of private and public buildings and other
events, deepening the experience of orchestral music and music education for
communities who would typically not otherwise engage with the music organization
(League of American Orchestras, 2009; Ravanas, 2007, 2008; Tamburri, Munn, &
Pompe, 2015). Tourists are included in the audience development, especially as for
guided tours in mostly well-known North American cities, with an ad hoc marketing
of bundles of attractions and hotels (Besana & Esposito, 2019).
As a crisis legacy for revenue management and diversification, the ‘public
good content’ has been stressed by the Fundraiser, asking for private philanthropy,
worldwide sponsorships and donations, the ‘creative and experience content’ has
been stressed by the Marketing Expert, instead, at the best supported by ICTs and
social media.
Fundraising may be thought full-grown and mature, as any segments of founda-
tions (from corporate to community, from independent to family ones), corporate
donors and philanthropists, they have been cashed for decades. While grants,
donations, and sponsorships, they are the main share of revenues (Besana, 2012;
Besana & Esposito, 2019), international friends might be the frontier of fundraising,
whose goals can match with marketing ones, when the tourist can get on to the
international friend.
Above all, social media have revealed themselves as leading and innovative
tools for more than one decade, in order to increase both marketing-oriented and
From Clubs to Communities. From Tourists to International Friends. Crisis. . . 33
fundraising-oriented audiences and segment them (Esposito, 2016; Roberts, 2014;

Van Bree, 2009).
Thanks to a k-means cluster analysis of diversified revenues, expenses and gains
from 2008 to 2015, the paper will separate this sample into two poles, according
to average variations of economic performances and to the focus on relationship
marketing in the whole period. One pole grew as concerns relationships, revenue
management and diversification. The other pole was affected by diminishing inten-
sity of marketing and increasing fundraising and, as a consequence, retrenchment of
some revenues except for contributions. Relationship marketing was in this cluster
supported by volunteers. This pole profited by the highest increase in gains.
2 Relationship Marketing in US Opera Houses

and Symphony Orchestras: From Engagement to Loyalty
Inside and Outside
Relationship marketing is a strategy designed to foster stakeholders’ engagement

and loyalty (Berry, 1995; Christopher, Payne, & Ballantyne, 1991) as it is essential
and indispensable to deal with different groups of stakeholders (Peck, 1996) and
with the wide range of connections between these groups (Christopher et al., 1991;
Doyle, 1995; Gummesson, 1996).
During the latest crisis, diminishing resources push music organizations to
differentiate, segment and maximize their relations with past and new stakeholders,
with the commitment of employees, whose roles are clearly separated, either
for marketing or fundraising. Without a trade-off in the allocation of resources
for marketing and fundraising, fundraisers and marketing officers must focus on
building effective relationships among and with staff and volunteers, in order to
enhance their engagement and ultimately to improve their performance (Bussell &
Forbes, 2006; Kumar & Pansari, 2016).
Volunteers, coming from different sectors of civic society, can act as fundraisers,
soliciting grants and contributions of money and goods and services from potential
donors. They can also be in charge of some general activities related to the
accomplishment of the organization mission.
On the one hand, for instance, orchestras and opera houses can offer to participate
in the effort to improve lives through programmes, on the other hand, staff and
volunteers can deliver ushering, ticket taking and other services, administrative
support in the office; organizing and executing fundraising events and special events
(like anniversaries, dinners with main conductors, videomaking of concert halls);
promoting main and ancillary activities to their friends, and in addition they could
be involved in facilitating experiences that make performances truly memorable.
Managing relationship marketing (Berry, 1995; Das, 2009) is important to define
strategies able to attract, maintain, and enhance long-lasting relationships with paid
and especially unpaid staff over time. In fact, relationship can become the salient
attribute linking staff and volunteers to the organization and, in the same time, the
pillar of the original motivation of volunteers (Arnett, German, & Hunt, 2003).
From this standpoint, relationship marketing allows orchestras and opera houses
to understand who staff and volunteers are and what drives them in their activities,
allowing organizations to identify the strategies more appropriate to manage each
of them. In addition, relationship marketing helps to meet the needs of stakeholders,
to provide them with information directly suited to their interests, values and
visions about the organizations (Bussell & Forbes, 2006, 2007), and to spread an
inside-awareness of the social values which lead the achievement of the mission
(Andreasen, Kotler, & Parker, 2003).
Adopting a marketing approach allows non-profit to generate stakeholders’ trust
and commitment (Hussain, Rawjee, & Penceliah, 2014), and to exploit strategically
valuable sustainable resources and capabilities, among employees and volunteers.
Furthermore, according to Scholars (Colbert, 2001; Hill, O’Sullivan, & O’Sullivan,
1995; Radbourne & Fraser, 1996), the more the organization learns about and
monitors the stakeholders’ needs, preferences, attitudes and concerns, the more
their satisfaction and commitment levels grow. In the same direction, if the mission
is properly internally communicated, it can intercept the stakeholders’ needs and
commitment, leading orchestras and opera houses to reach sustainable management.
3 Method
990 Forms of the fiscal years 2015 and 2008 are analysed for the IRS—USA
Internal Revenue Service—category ‘A69-Symphony Orchestra’ and ‘A6A-Opera’:
100 organizations for every category, from the highest to the lowest total income.
These reports can be downloaded from the Guidestar website www.guidestar.org
and the main websites of organizations themselves.1 The sample sums up to 158
organizations, whose available 990 Forms were downloadable at www.guidestar.org
or their websites.
According to 990 Forms Glossary and Accounting Standards, contributions for
US not-for-profit organizations include the direct public support from individuals,
grant-makers, foundations, sponsors like corporations and the Government grant
for projects of public interest. In the accounting lines of revenues, contributions can
be summed up with the programme service revenue, which is money for sold and
rendered services.
Contributions and programme service revenue are 85% of total revenues of the
here-investigated sample. Next to them, ancillary revenues come from interests and
1 The Guidestar website collects 990 Forms of USA Not-For-Profits. Not-For-Profits are listed
for the relevancy to the keyword. 990 Forms report Statements of Revenues and Expenses and
Financial Statements of USA Not-For-Profits.
gains of financial assets, sales of assets, rental income, fundraising from special
events and other residual revenues.
The composition of revenues will be here investigated for 2015–2008 percent
change of main categories: Contributions with the target of the willingness-
to-donate, Programme Service Revenue with the target of willingness-to-pay,
Investment Income and Other Revenue.
Expense categories include the following: Programme Service Expense related
to marketing and management of the core business; Fundraising expense and
Management and general expense, a miscellaneous cost that is not related to the
previous accounting lines.
Next to revenue and expense categories, the (Net) Gain or Loss of the year
as the difference—positive or negative between revenues and costs is also here
investigated.
For expense categories and gains (or losses), 2015–2008 percentage changes
will be, at the same time, calculated in order to focus on trends of economic
performances during and soon after the crisis times.
In order to gain the impact of employees (like fundraisers and marketing officers)
and volunteers on economic performances, the ratio of volunteers/employees was
added as concerns 2015s data. At the end of the crisis, this ratio is meaningful
in order to show how much volunteers and employees have led, and they are
leading engagement and loyalty from the inside of the organization, fundraising
and marketing from the outside of the organization.
All the monetary data are, first of all, filed in Excel, and 2015–2008 percentage
variations are calculated for main items: programme service revenues, contributions,
investment income, other revenue, programme service expense, management and
general expense, fundraising expense, gain or loss.
Secondly, together with volunteers’/employees’ ratios, these variations are clus-
tered in order to obtain meaningful groups with relevant and separating features.
We have adopted the K-means clustering as an iterative follow-the-leader
strategy.
4 Key Findings and Discussion: The Fundraiser

and the Revenue Manager on the Stage of US Classical
Music
K-means clustering of the above-mentioned sample of 158 is significant for 120

organizations, which are divided into two clusters. Average performances of two
clusters are shown in Table 1. Membership of clusters is reported in Appendix.
The most crowded cluster (74 organizations) is the Fundraiser who shows a very
important increase in the fundraising expense, +17.45% and as a consequence, in
contributions, +18.42%. Save for a very modest increase in the programme service
expense (+0.87%), any other item is decreasing. Gains are consistently increasing,
Table 1 The crisis legacy for 120 USA symphony orchestras and opera houses (average 2015–
2008% change)
Fundraiser −74 organizations Revenue manager −46
Contributions +18.49 +12.82
Programme service revenue −13.81 +21.99
Investment income −28.20 +75.85
Other revenue −31.70 +50.69
Programme service expense +0.87 +13.26
Management and general expense −11.94 +44.82
Fundraising expense +17.45 +40.17
Gain or loss +46.69 +9.50
Volunteers/employees 9.15 1.04
Source: Elaboration with Jump Statistics Software
+46.69%. Volunteers are here essential, nine times employees. They play the role
of fundraisers, calling for donations, sponsorships and grants. Social media are
mature gatekeepers, in order to promote special events, campaigns, community
empowerment. Communities are engaged with plentiful programmes in private and
public buildings where orchestra and opera officers tell their histories, seasons,
special events and where rehearsals, edutainment and fundraising campaigns take
place. Main organizations of big cities like Chicago, Dallas and Los Angeles are
included in this cluster. Nevertheless, middle-sized and small American towns are
included, too, where performances are together with lunch, dinner, coffee and
‘gelato’ timing, behind the scenes, with intimate concerts, music and wellness
programmes.
Revenue diversification is significant in the second cluster, the Revenue Manager.
The investment income increase of +75.85% is here matching with increasing other
revenue, programme service revenue and contributions, these ones not so high as
in the other pole of the Fundraiser. Expenses are increasing and so are gains,
but not with the same percentage of the Fundraiser. Some of these organizations
count on employees, who show proficiency in investing in financial markets as
well as partnershiping with donors’ clubs and international friends worldwide. This
cluster includes giants like the Met. Several middle-sized and small opera houses
and symphony orchestras are here included, whose halls see music travellers of
different music genres and whose social media marketing is well-developed in order
to engage citizens and tourists, donors, clubs, sponsors and international supporters.
Plan Your Visit is provided with information about parking, accessibility, hotels,
attractions, programmes notes and comments. Tourists are not more a frontier for
marketing in these organizations.
5 Conclusion
Today marketing and fundraising of US symphony orchestras and opera houses,

they both include diversified tactics and strategies: audiences and philanthropists
are investigated as for their willingness-to-pay and willingness-to-donate. Tourists
do not more represent the frontier of their flexible subscriptions. Social media are
levers of all their audiences and stakeholders.
As a matter of fact, thanks to a price strategy that implies discrimination
both for audiences and philanthropists, symphony orchestras and opera houses
are connecting with communities, and they are emphasizing relationships, whose
performances are particularly meaningful for the Fundraiser cluster. When frontiers
of marketing are open to new, innovative and international segmentation and they
include tourists, the Revenue Manager is the prevailing profile.
Considering the latest 10 years, it can be confirmed that marketing is as
essential as fundraising. Revenue management implies the key consideration that
fundraising performances can support or compensate marketing ones, especially
when marketing of the place is maximizing occupancy of the houses. Focus on
several and multiple stakeholders is the main objective, and marketing is separated
from fundraising so that the location can maximize occupancy and revenues.
Research limitations refer, first of all, to the opportunity of the here-investigated
organizations to develop new targets like tourists, when US destinations are very
different as for tourism: some of them are very attractive as they refer to main
opera houses and concert halls like the Met and Carnegie in New York, while some
of them remain attractions for business travellers, who are not mainly concerned
with opera and classical music as the most important motivation of their journey.
Secondly, the here-investigated period was a matter of a real and financial crisis,
whose implications hit the whole US economy in spite of skills and marketing
efforts of opera and symphony managers. The general lack of resources was deeply
affecting all not-for-profit organizations.
Managerial implications imply that managers of these music organizations
should continually stress the importance of the selection of new targets. Above all,
their segmentation should, at the same time, exploit their willingness-to-pay on the
fundraising side (international friends) and on the marketing side (tourists). Social
media will facilitate these segmentation and exploitation as they result efficient and
pervasive communication channels.
A.1 Appendix
A.1.1 Cluster Fundraiser
ARIZONA OPERA COMPANY—PHOENIX

BALTIMORE OPERA COMPANY INC—BALTIMORE
BANGOR SYMPHONY ORCHESTRA—BANGOR

BOSTON LYRIC OPERA COMPANY—BOSTON
CALIFORNIA SYMPHONY ORCHESTRA INC—WALNUT CREEK
CANTON SYMPHONY ORCHESTRA ASSOCIATION—CANTON
CHEYENNE SYMPHONY SOCIETY INC—CHEYENNE
CHICAGO SINFONIETTA—CHICAGO
CHICAGO SYMPHONY ORCHESTRA—CHICAGO
CINCINNATI OPERA ASSOCIATION INC—CINCINNATI
CINCINNATI SYMPHONY ORCHESTRA—CINCINNATI
COBB SYMPHONY ORCHESTRA—MARIETTA
DALLAS SYMPHONY ASSOCIATION—DALLAS
DES MOINES METRO OPERA INC—INDIANOLA
DETROIT SYMPHONY ORCHESTRA INC—DETROIT
ERIE PHILHARMONIC INC—ERIE
FAIRFAX SYMPHONY ORCHESTRA—FAIRFAX
GREAT FALLS SYMPHONY ASSOCIATION INC—GREAT FALLS
GREATER AKRON MUSICAL ASSOCIATION INC—AKRON
GREENSBORO SYMPHONY ORCHESTRA INC—GREENSBORO
JACKSONVILLE SYMPHONY ASSOCIATION INC—JACKSONVILLE
JOHNSTOWN SYMPHONY ORCHESTRA—JOHNSTOWN
LANCASTER SYMPHONY ORCHESTRA—LANCASTER
LENAWEE SYMPHONY ORCHESTRA SOCIETY INC—ADRIAN
LONG BEACH SYMPHONY ASSOCIATION—LONG BEACH
LOS ANGELES OPERA COMPANY—LOS ANGELES
LYRIC OPERA OF CHICAGO—CHICAGO
MADISON OPERA—MADISON
MEMPHIS ORCHESTRAL SOCIETY INC—MEMPHIS
MOBILE SYMPHONY INC—MOBILE
MUSIC CENTER OF SOUTH CENTRAL MI—BATTLE CREEK
NASHVILLE OPERA ASSOCIATION—NASHVILLE
NASHVILLE SYMPHONY ASSOCIATION—NASHVILLE
NEVADA OPERA ASSOCIATION—RENO
NEW HAVEN SYMPHONY ORCHESTRA INC—NEW HAVEN
NEW JERSEY SYMPHONY ORCHESTRA—NEWARK
NEW MEXICO SYMPHONY ORCHESTRA—ALBUQUERQUE
NEW ORLEANS OPERA ASSOCIATION—NEW ORLEANS
NEW YORK CITY OPERA INC—NEW YORK
NEWBERRY OPERA HOUSE FOUNDATION—NEWBERRY
NORTH ARKANSAS SYMPHONY ORCHESTRA—FAYETTEVILLE
OMAHA SYMPHONY ASSOCIATION—OMAHA
OPERA BIRMINGHAM—BIRMINGHAM
OPERA COLORADO—DENVER
OPERA OMAHA—OMAHA
OPERA SAN JOSE INCORPORATED—SAN JOSE
OPERA SOUTHWEST—ALBUQUERQUE
OREGON SYMPHONY ASSOCIATION—PORTLAND

PALM BEACH OPERA INC—WEST PALM BEACH
PENSACOLA OPERA INC—PENSACOLA
POCKET OPERA INC—SAN FRANCISCO
PORTLAND OPERA ASSOCIATION—PORTLAND
ROANOKE SYMPHONY ORCHESTRA—ROANOKE
SACRAMENTO PHILHARMONIC ORCHESTRA ASSOCIATION INC—
SACRAMENTO
SAINT LOUIS SYMPHONY ORCHESTRA—SAINT LOUIS
SAN ANTONIO OPERA—SANT ANTONIO
SAN DIEGO SYMPHONY ORCHESTRA ASSOCIATION—SAN DIEGO
SANTA BARBARA SYMPHONY ORCHESTRA ASSOCIATION—SANTA
BARBARA
SARASOTA OPERA ASSOCIATION INC—SARASOTA
SEATTLE OPERA—SEATTLE
SHEBOYGAN SYMPHONY ORCHESTRA INC—SHEBOYGAN
SPRINGER OPERA HOUSE ARTS ASSOCIATION INC—COLUMBUS
STOCKTON SYMPHONY ASSOCIATION INC—STOCKTON
SYRACUSE OPERA COMPANY INC—SYRACUSE
THE ATLANTA OPERA INC—ATLANTA
THE HENDERSONVILLE SYMPHONY ORCHESTRA INC—HENDERSON-
VILLE
THE OPERA ASSOCIATION OF CENTRAL OHIO—COLUMBUS
TOLEDO OPERA ASSOCIATION—TOLEDO
TRAVERSE SYMPHONY ORCHESTRA—TRAVERSE CITY
TULSA OPERA INC—TULSA
VIRGINIA OPERA ASSOCIATION—NORFOLK
WHATCOM SYMPHONY ORCHESTRA—BELLINGHAM
WICHITA GRAND OPERA INC—WICHITA
WILLIAMSPORT SYMPHONY ORCHESTRA—WILLIAMSPORT
A.1.2 Cluster Revenue Manager
ALBANY SYMPHONY ORCHESTRA INC—ALBANY

BERKELEY SYMPHONY ORCHESTRA—BERKELEY
BOSTON YOUTH SYMPHONY ORCHESTRA INC—BOSTON
BUFFALO PHILHARMONIC ORCHESTRA SOCIETY INC—BUFFALO
CHATTANOOGA SYMPHONY AND OPERA ASSOCIATION—CHATTA-
NOOGA
DAYTON PHILHARMONIC ORCHESTRA ASSOCIATION—DAYTON
DUBUQUE SYMPHONY ORCHESTRA—DUBUQUE
EL PASO SYMPHONY ORCHESTRA ASSOCIATION INC—EL PASO
EUGENE SYMPHONY ASSOCIATION INC—EUGENE

FLORENTINE OPERA COMPANY INC—MILWAUKEE
GLENS FALLS SYMPHONY ORCHESTRA INC—GLEN FALLS
HAWAII OPERA THEATRE—HONOLULU
HOUSTON GRAND OPERA ASSOCIATION INC—HOUSTON
KALAMAZOO SYMPHONY ORCHESTRA—KALAMAZOO
KANSAS CITY SYMPHONY—KANSAS CITY
KENTUCKY OPERA ASSOCIATION—LOUISVILLE
KNOXVILLE SYMPHONY SOCIETY INC—KNOXVILLE
LYRIC OPERA OF KANSAS CITY—KANSAS CITY
METROPOLITAN OPERA ASSOCIATION INC—NEW YORK
MONTEREY COUNTY SYMPHONY ASSOCIATION INC—CARMEL
OPERA AMERICA INC—NEW YORK
OPERA CAROLINA—CHARLOTTE
OPERA COMPANY OF PHILADELPHIA—PHILADELPHIA
OPERA IN THE HEIGHTS—HOUSTON
OPERA NORTH—LEBANON
PEORIA SYMPHONY ORCHESTRA FOSTER ARTS CENTER—PEORIA
PIEDMONT OPERA INC—WINSTON SALEM
PITTSBURGH OPERA INC—PITTSBURGH
PORTLAND MAINE SYMPHONY ORCHESTRA—PORTLAND
QUAD CITY SYMPHONY ORCHESTRA ASSOCIATION—DAVENPORT
RHODE ISLAND PHILHARMONIC ORCHESTRA & MUSIC SCHOOL—
EAST PROVIDENCE
SAN FRANCISCO OPERA ASSOCIATION—SAN FRANCISCO
SANTA ROSA SYMPHONY ASSOCIATION—SANTA ROSA
SEATTLE YOUTH SYMPHONY ORCHESTRAS—SEATTLE
SHREVEPORT OPERA—SHREVEPORT
SKYLIGHT OPERA THEATRE—MILWAUKEE
SOUTH BEND SYMPHONY ORCHESTRA ASSOCIATION INC—SOUTH
BEND
SYMPHONY SOCIETY OF SAN ANTONIO
TACOMA OPERA ASSOCIATION—TACOMA
THE LOUISVILLE ORCHESTRA INC—LOUISVILLE
THE LOUSIANA PHILHARMONIC ORCHESTRA—NEW ORLEANS
THE MINNESOTA OPERA—MINNEAPOLIS
THE STAMFORD SYMPHONY ORCHESTRA INC—STAMFORD
UTAH FESTIVAL OPERA COMPANY—LOGAN
WEST SHORE SYMPHONY ORCHESTRA—MUSKEGON
WOODLAND OPERA HOUSE INC—WOODLAND
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Measuring Dynamic Capabilities-Based
Synergies in M&A Deals with Real
Options: Amazon’s Acquisition of Whole
Food
Andrejs Čirjevskis
“Amazon buying Whole Foods is incredibly interesting, highly

strategic, and definitely not standard” Josh Chapman, Toptal
Finance Expert
(Clarence-Smith, 2020)
Abstract Acquisition-based dynamic capabilities have become well established

as a new imperative for organizing M&A processes. However, understanding the
full benefits and possible limits of real options applications to measure a dynamic
capability-based (managerial) synergy remains a challenge. The paper draws on real
options theory to describe some of these benefits and limits to value a synergy
in highly strategic and not standard M&A deals. The acquisition of Whole Foods
by Amazon makes it possible to combine two streams of research on dynamic
capabilities and real options in a cohesive whole. More specifically, the author
develops three propositions to justify the role of dynamic capabilities as antecedents
of success or failures of M&A deals and to demonstrate real options application to
measure synergies of M&A deals.
Keywords Merger and acquisition · Dynamic capabilities · Synergy · Real

options
1 Introduction: Purpose, Motivation, and Originality
“Synergies do not magically materialize. By definition, they are possibilities, not

certainties” (Ficery, Herd, & Pursche, 2007, p. 35). While there is some evidence of
synergy in the aggregate across all acquisitions, most mergers fail in delivering any
A. Čirjevskis ()
RISEBA University of Applied Sciences in Business, Arts and Technology, Riga, Latvia
e-mail: andrejs.cirjevskis@riseba.lv

https://doi.org/10.1007/978-3-030-63970-9_3
44 A. Čirjevskis
synergy (Damodaran, 2005, p. 47). This paper aims to justify the role of dynamic
capabilities as antecedents of success or failures of M&A deals and to demonstrate
real options application to measure managerial synergies in M&A deals. In the
current paper, the author argues that the intersection between dynamic capabilities
frameworks and real options theory can shed light on the antecedents of successes
and failures of M&A deals.
The interaction between dynamic capabilities and real option valuation enables
the acquirer to elect and exercise those options that have a high probability to
provide managerial synergies and let expire the options that have low probability.
The paper develops three propositions as follows. The probability to exercise a real
option in the M&A deal can be measured by exploring similarities and complemen-
tarity of the dynamic capabilities of acquirers and targets. The managerial synergies
are provided by the successful integration of the dynamic capabilities of an acquirer
and a target. Such type of synergy can be assessed and measured by real option
application.
The motivation for this research is as follows. First, the majority of papers on the
synergetic effects of M&A deals typically focus on a particular type of synergy
(Loukianova, Nikulin, & Vedernikov, 2017), while the current paper proposes
a model that accounts for the cumulative simultaneous effect of different types
of operating, financial, and dynamic capabilities-based synergies. Second, even
though the dynamic capabilities framework and its empirical applications (Capron
& Anand, 2007; Teece, 2007, 2011) make dynamic capabilities more visible, the
real option application making dynamic capabilities measurable in the M&A deals.
The originality of this research is an application of the real option pricing theory to
recent Amazon’s acquisition of Whole Foods to measure the synergies as an added
value to the acquirer’s shareholders.
The author selected Amazon’s acquisition of Whole Food due to following
reasons. The synergy is reflected in additional value created by unifying the
companies. For the M&A deal to be successful, this value of a newly merged
company should be larger than the value of the stand-alone companies before
M&A (Loukianova et al., 2017). So, what does Amazon hoped to gain with this
merger? This paper analyzes Amazon acquisition’s antecedents through the lenses
of dynamic capabilities framework and real options theory.
The paper has the following structure. The first section introduces the concept of
dynamic capabilities as antecedents of successful M&A deals, synergies that arise
from an M&A deal, and discusses the applicability of the real options approach for
their assessment. The role of dynamic capabilities in the M&A deal is discussed
in terms of abilities to integrate two merging companies in search of synergies.
The sections are devoted, respectively, to develop three propositions which can be
justified empirically by analysis of recent Amazon’s acquisition of Whole Food
case. The following section provides an application of the real options theory to
Amazon’s dynamic capabilities in the case of Whole Food acquisition. The method
was used ex-post to find synergy values in a recent Amazon’s M&A deals (2017–
2018) and produced sound results.
On average, the author found that the option premiums exceeded the actual
takeover premium suggesting that, from an option pricing point of view, this
Measuring Dynamic Capabilities-Based Synergies in M&A Deals with Real. . . 45
acquisition was not overpaid. At the end of the paper, the author discusses theoretical
and managerial contributions. In conclusion subchapter, the author highlights the
research limitations and future works.
2 Key Literature Review
Dynamic capabilities are the renewing and regenerative capabilities that enable
firms to change their operating processes incrementally and radically. Real options
valuation provides an appropriate platform for firms to measure managerial flexibili-
ties. “The two distinct concepts of dynamic capability and real options have received
notable attention from strategic management scholars in recent years. These two
streams of research in strategic management literature are certainly not mutually
exclusive” (Jahanshahi & Nawaser, 2018, p. 395).
Nevertheless, there are many differences between real options theory and
dynamic capability framework like the difference in the origin, in the aims, and
in the context of usage, there are many similarities within two concepts. Both are
necessary for managing changes, both are created by managers, and both are new
and growing concepts (Jahanshahi & Nawaser, 2018). Dynamic capabilities are
necessary to exploit real options opportunities, whereas real options are necessary
to evaluate opportunities (Jahanshahi & Nawaser, 2018).
2.1 Exploring Dynamic Capabilities in Merger and Acquisition

Deals
The recent scientific discussion in the field of strategic management broadly favors
the idea of dynamic capabilities to overcome potential rigidities of organizational
capability building (Schreyogg & Kliesch-Eberl, 2007). “The theoretical and prac-
tical importance of developing and applying dynamic capabilities to sustain a
firm’s competitive advantage in complex and volatile external environments has
catapulted this issue to the forefront of the research agendas of many scholars”
(Zahra, Sapienza, & Davidsson, 2006, p. 917).
Stefano et al. argue that despite the exceptional rise in interest and influence of
dynamic capabilities, criticisms of the dynamic capabilities’ perspective continue
to mount (Stefano, Peteraf, & Verona, 2014). Common concerns are related to
a lack of consensus on basic theoretical elements and limited empirical progress
(Stefano et al., 2014). Specific capabilities that have been identified and studied
involve research and development (Helfat, 1997), product innovation (Danneels,
2002), ambidextrous organizational structures (O’Reilly & Tushman, 2013), net-
work responsiveness (Kleinbaum & Stuart, 2014), and human capital management
(Chatterij & Patro, 2014).
46 A. Čirjevskis
However, there are only a few pieces of research on specific dynamic capa-
bilities that have been identified and studied involving mergers and acquisitions.
Teece argues that it might be “because assets are bundled together often tightly
linked inside incumbent firms, it may be difficult to obtain assets in the desired
configurations through asset purchase or sale in mergers and acquisitions” (Teece,
2007). What is more, there is no consensus, how to measure synergies in merger and
acquisition deals created by dynamic capabilities.
“Studies give clear empirical evidence that complementarities are a significant
factor for M&A success” (Bauer & Matzler, 2014, p. 272). Through the interaction
of complementary characteristics, value creation does not only derive from cost
savings, but the value is also created by a growing turnover and market share thanks
to dynamic capabilities (Kleinbaum & Stuart, 2014). Complementarity has been
studied in terms of top management team complementarity (Kleinbaum & Stuart,
2014), technological complementarity (Makri, Hitt, & Lane, 2010), strategic and
market complementarity (Kim & Finkelstein, 2009), or product complementarity
(Wang & Zajac, 2007).
However, the study in terms of complementarity of dynamic capabilities in
M&A is still waiting for researchers. It is especially true for an application of
real options to measure added value created by dynamic capabilities. In the recent
publications, Čirjevskis argues and demonstrates (2017, 2019) that a dynamic
capabilities framework (Teece, 2007, 2011) is useful to business analyses of M&A
deal to identify similarities and complementarity between the dynamic capabilities
of an acquirer and a target.
Therefore,
Proposition 1 The higher the degree of similarities and complementarity between
the dynamic capabilities of an acquirer and a target, the higher the probability to
exercise of a real option on an acquisition of this target.
2.2 Exploring Synergies in M&A as Market Value-Added
A combined company can achieve synergistic benefits by generating economies of

scale and scope through assets consolidation, combining sales operations, sharing
information, distribution channels, and eliminating redundant operation sources
(Alhenawi & Krishnaswani, 2015; Capron, 1999). Although synergies have been
under intense interest and study for decades, there is still no common ground on
what appropriate way for categorizing synergy items. Trautwein’s (1990) efficiency
theory distinguishes three main categories of synergies: operational, financial, and
managerial.
Managerial synergies refer to gains that the bidder can achieve in a situation in
which the acquiring company’s management has super knowledge and acquisition-
based capabilities (Bosecke, 2009, p. 27; Trautwein, 1990). These knowledge and
acquisition-based capabilities can be hugely advantageous regarding the future of
the combined company and vital for acquirer management (Goold & Campbell,
1998). Capron and Anand (2007) named those as acquisition-based dynamic
capabilities. In this vein, dynamic capabilities (superior knowledge and capabilities
of the acquiring company’s management) can generate dynamic capabilities-based
(managerial) synergies. Synergies in an acquisition are a function of strategic
similarity, complementarities, and transferability of dynamic capabilities in the
M&A deals. Merging companies generate managerial synergies by working closely
together and executing tasks through an iterative knowledge-sharing process.
However, there is no single way how to identify, validate, and value the potential
of dynamic capabilities-based synergy, and valuation can be done in using different
approaches. If the acquirer wants to ensure a successful value creation process, the
application of appropriate measurement tools is essential. In recent publications,
scholars (Čirjevskis, 2017, 2019) provided the practice-driven model that bridges
the dynamic capabilities framework with building blocks of the business model
canvas (Osterwalder & Pigneur, 2009). The presented methodology is encouraging
to analyze the importance and strengths of acquisition-based dynamic capabilities
and to measure the degree of similarities, complementarity, and transferability of
dynamic capabilities of an acquirer and a target that is useful to the current research.
Thus,
Proposition 2 Managerial synergies in M&A deals are provided by the degree of
similarities, complementarity, and transferability of the dynamic capabilities of an
acquirer and a target.
2.3 Measuring Dynamic Capabilities-Based Synergies in M&A

with a Real Option
To account for managerial flexibility connected with an M&A deal that is reflected
in different future potential strategic alternatives, several authors (see, e.g., Baldi
& Trigeorgis, 2009) have proposed embedding a real options perspective in the
valuation framework. Acquisitions sometimes open up possibilities that would not
have been available otherwise, and these opportunities are difficult to convert into
expected cash flows. The real options argument is heavily dependent upon two
concepts—the learning that occurs by being in a new market and the more informed
decisions that flow from the learning (Damodaran, 2005).
Thus, there are various strategic managerial real options embedded in mergers
and acquisitions. Real options analysis provides a technique for incorporating and
valuing synergies that generate by dynamic capabilities in mergers and acquisitions.
In this vein, the value of synergies of dynamic capabilities-based synergies in
M&A can be measured with a real options valuation technique. The incorporation
of real options into the synergy valuation measures managerial flexibility arising
from M&A deals (Loukianova et al., 2017). Dunis and Klein (2005) argue that
synergies can be viewed as a real option value employing input variables for the
48 A. Čirjevskis
European and/or American call option with Black Scholes Option Pricing Model
and/or accordingly with Binominal Option pricing model.
The share price (So) is proxied by the sum of capitalization of merging compa-
nies before the deal’s announcement. The exercise price (E) is proxied by the sum of
the future market capitalization of merging companies in 1 year if the merger would
not be consummated. Thereby, the future capitalization of two separate companies
can be calculated employing a discounted free cash flow method. Cash flow is, in
theory, the free cash flow, but in practice, it is proxied by EBITDA. Therefore,
the exercise price is the hypothetical future market value without the merger or
theoretical market value calculated by using revenue and EBITDA multiples.
The volatility (σ ) of share price can be obtained from the V-Lab APARCH
Volatility Analysis (NYU Stern, 2019) or by direct observation. Assuming semi-
efficient markets that incorporate publicly available new information promptly, the
calculation of the standard deviation of the acquirer stock price return was started
the week after the announcement.
Duration (T) getting synergy is managerial anticipation of when dynamic
capabilities-based synergies would be fully realized in terms of the year following
completion of the merger or acquisition. For time to maturity, 1 year was assumed
for the deal of Amazon-Whole Food. This was due to data availability and the
assumption that efficient markets should have well anticipated potential long-term
merger gains within this period even if accounting data might not reflect any benefits
in this short period due to integration costs. The US dollars was chosen as the
reference currency for Amazon Whole Food. The risk-free rate (rf) is a long-term
government bond yield of an acquirer’s country (Dunis & Klein, 2005).
Therefore,
Proposition 3 Dynamic capabilities-based synergies in M&A deals can be mea-
sured by real options application using BSOPM and BOPM.
To test the internal and external validity of the proposed propositions, it was
applied to a recent case of dynamic capabilities-based M&A deal in the grocery
retail industry: Amazon’s acquisition of Whole Food in 2017.
3 Illustrative Case Study Amazon’s Acquisition of Whole

Food
Most acquisitions are carried out to acquire these target firm’s capabilities; how is
the Amazon acquisition of Whole Foods in 2017 different?
3.1 Illustration of Acquisition-Based Dynamic Capabilities

of Amazon.com
Justification of Proposition 1 The higher the degree of similarities and complemen-

tarity between the dynamic capabilities of an acquirer and a target, the higher the
probability to exercise of a real option on an acquisition of this target.
The persistence of existing dynamic capabilities depends on the impetus for
change (sensing), the strength of the perceived need to change (seizing), and the
managerial capacity to integrate and recombine resources (transforming) as desired
(Teece, 2007; Zahra et al., 2006). Zahra et al. (2006) argue that the lack of success
to solve a problem with current capabilities triggers the development and use or
acquire new dynamic capabilities. The research has explored the selected dynamic
capabilities of the target company and the acquirer’s company.
There are several similarities between the dynamic capabilities of Amazon and
Whole Food. Both companies are sensing market demands and seizing external
opportunities. However, their transforming capabilities need to be mutually comple-
mented. To grab for more grocery market share, Amazon should learn to sell food
offline (Kowitt, 2018). On the other hand, having a variety of niche products with
a high price charged, the growth of Whole Foods had slowed because competitors
began to offer organic foods at a lower price. From 2013 to 2016 Whole Foods
lost nearly half its market value (Helmore, 2017). That is why just a few days after
the merger, Amazon dropped prices by as much as 43% of a range of Whole Food
products (Garfield, 2017).
Amazon has limited knowledge and experience in the offline retail environment.
That is why, for Amazon Fresh to be successful, the company needed to acquire
more expertise in perishable grocery procurement. It made the probability to
exercise the real option of the acquisition of Whole Foods as very high.
Justification of Proposition 2 Managerial synergies in M&A deals are provided
by the degree of similarities, complementarity, and transferability of the dynamic
capabilities of an acquirer and a target.
How acquisition-based dynamic capabilities contribute to reduce cost, to cre-
ate a new revenue stream, to deliver a new value proposition, and therefore
provide a managerial synergy by adding market value-added of the acquirer?
The acquisition-based dynamic capabilities helped Amazon to provide managerial
synergies. Amazon sensed that Whole Foods would provide broad access to retail
outlets in a great location across the USA. Amazon seized a high-end brand name of
Whole Foods and affluent buyers of Whole Foods. The justification of managerial
synergies in this deal is as follows.
A grocery is a category that people buy almost every day. However, Whole Foods
had only a 1.2% share in this market that was dominated by Walmart with a 14.5%
share, and even Amazon could not get more than 0.2% market share in the last
10 years (Thomas, 2017). Having exploited big data strategy, Amazon can create a
50 A. Čirjevskis
daily habit among buyers to order groceries from its app and to make them loyal
clients who are highly profitable for the corporation. It also can reduce Amazon’s
supply chain management’s costs due to higher purchasing and bargaining power.
With Whole Food and Go stores, Amazon operates 603 physical stores in 60
cities in the USA giving customer delivery in as far as an hour on the thousand
organic products from Whole Foods (Redman, 2018). Having added grocery
dynamic capabilities through the acquisition of Whole Foods, Amazon offers click-
and-collect service for quality-conscious buyers, enjoys higher operating profit,
and offers stores as points to pick up other online orders. Therefore, Amazon can
transform its customer value proposition, deliver new value to the buyers of both
companies, and capture new added value for shareholders.
Justification of Proposition 3 Dynamic capabilities-based synergies in M&A deals
can be measured by real options application using BSOPM and BOPM.
On June 16, 2017, Amazon.com announced that it would purchase Whole Foods
Market for a total of $13.7 billion. The capitalization of Amazon was $478.6 bn;
the capitalization of Whole Food was $13.8 bn (Pillars of Wall Street, 2017).
The exercise price (E) is the combined hypothetical future market value after
1 year without a merger. The hypothetical future market value of the separated
entities (target and acquirer) after 1 year has been calculated using EV/Revenues
(Enterprise Value) and EV/EBITDA (Enterprise Value/Earnings before Interest,
Taxes, Depreciation, and Amortization) multiples. Having used Amazon revenues
$142.6 bn in 2017 and EV/Revenues multiple 3.3 (Pillars of Wall Street, 2017),
the hypothetical future market value of Amazon without the acquisition has been
estimated as $ 470.6 bn.
Having used Whole Food EBITDA $ 1.3 bn in 2017, and EV/EBITDA multiple
11.1 (Pillars of Wall Street, 2017), the hypothetical future market value of Whole
Food without the merger has been estimated as $ 14.3 bn. Therefore, the cumulated
hypothetical future market value of the target and the acquirer after 1-year equals
(E) $ 484.9 bn.
The risk-free rate of return (rf) in 2017 has been defined as Long-Term
Government Bond Yields (10 years) for the USA which was 2.16% (YCharts,
2020). Expected volatility (σ ) has been determined based on historical volatilities
for 3 years. Following the AlphaQuery report (AlphaQuery, 2020), the volatility
(σ ) of Amazon after an announcement of the acquisition was assumed as 25.25%.
Time to expiration in years (T) equals 1 year with five-time steps (one step is
about 2 months) for the Binominal Option pricing model. The option premium as a
competence-based synergies result has been calculated using an Excel spreadsheet.
Results are given in Tables 1, 2, 3, and 4 as follows.
According to the Black-Sholes Option pricing model (BSOPM), the value of the
real option (call option value as synergies value) equals $ 50 bn as shown in Table
1. According to the Binominal Option pricing model (BOPM) equals $52.7 bn as
shown in Tables 3 and 4.
Therefore, the expected market value of Amazon, Inc. is the cumulated future
market value of target and acquirer before the announcement (So) $ 478.6 bn plus
Table 1 Black Scholes

option pricing model (in $ bn) Real Options valuation Black-Scholes
The cumulated market value of target and acquirer
before the announcement (So) 478.60
Hypothetical future market of the separated entities
forecast before the merger (K) 484.90
The risk-free rate of return (Rf) in 2017 2.16%
Time to expiration in years (T) 1
The volatility of future share price Amazon (σ) in
July of 2017 after the announcement 25.50%
d1 0.161
d2 -0.094
Value of the call option (C) = Synergies 50.4
Table 2 Recombining Real options binomial option pricing model

binomial lattice parameters
Time increment (years) 0.20
Up factor (u) 1.121
Down factor (d) 0.892
Risk-neutral probability (p) 0.490
Table 3 Binominal option pricing model: a lattice of the underline values of Amazon after the
acquisition (in $ bn)
0 1 2 3 4 5
846.46
755.23
673.83 673.83
601.21 601.21
536.41 536.41 536.41
478.60 478.60 478.60
427.02 427.02 427.02
380.99 380.99
339.93 339.93
303.30
270.61
synergies $52 bn equals $ 530.6 bn. Takeover premium is the difference between
the market price $13.8 billion (or estimated value $14.3 billion) of a company and
the actual price paid to acquire it ($13.4 billion), expressed as a percentage (2.8–
3.0%). The premium represents the additional value of owning 100% of a company
in a merger or acquisition and is also known as the control premium. The control
premium is the additional benefit an acquirer receives (compared to an individual
shareholder) from having full control over the business.
Therefore, the author found that the option premium significantly exceeded the
actual takeover premium suggesting that, from an option pricing point of view, those
acquisitions provided significant dynamic capabilities-based synergies. Put simply,
the acquisition was able to generate significant value-added for the acquirer’s
shareholders. “In most acquisitions, even those where synergy is real and creates
52 A. Čirjevskis
Table 4 Binominal option pricing model. Real options lattice: a value of Amazon synergies of
the acquisition (in $ bn)
0 1 2 3 4 5
361.56
272.42
193.11 188.93
130.11 118.40
84.19 70.58 51.51
52.7 40.70 25.16
22.92 12.29 0.00
6.00 0.00
0.00 0.00
0.00
0.00
value, the acquiring firm’s stockholders get little or none of the benefits from
synergy” (Damodaran, 2005, p. 41), due to biased evaluation process; managerial
hubris (pride), and a failure to plan for synergy. But it is not a case of Amazon’s
acquisition of Whole Food! Firms that like Amazon are disciplined when “making
acquisitions and stay focused are better able to deliver promised synergy benefits.
Synergy is difficult to deliver but it is not impossible to create” (Damodaran, 2005,
p. 44).
4 Finding and Discussion
Jahanshahi and Nawaser (2018) argue that study on a real option and dynamic
capabilities suggest future research on many open questions. “Future research can
test this relationship in the project and firm-level” (Jahanshahi & Nawaser, 2018, p.
400). The current paper contributes to this scientific discussion. The current paper
justified the role of dynamic capabilities as antecedents of success or failures of
M&A deals and to demonstrate real options application to measure managerial
synergies in M&A deals.
Testing empirically this relationship, current paper enriches our knowledge about
how organizations can benefit from real option and redefine dynamic capabilities
framework to the heart of strategic management. Therefore, the paper contributes
and demonstrates how acquisition-based dynamic capabilities provide managerial
synergies. This is the major theoretical contribution of the current paper.
Whole Food is an attractive platform for Amazon for the transformation of an
industry. Therefore, the first and second propositions have been justified empirically.
Having advanced future research designs for real option valuation, Trigeorgis and
Reuer (2017, p. 57) argue “we would encourage the use of real option with a
greater focus on the individual project level of analysis, . . . on individual real
Fig. 1 The relationship among developed propositions
option cases.” Therefore, the current research also contributes to the real options
theory in strategic management. Regarding managerial contribution, the proposed
approach to value M&A synergy can be identified and assessed in the pre-merger
due diligence process.
According to Bruner (2004, pp. 326–327), the synergy areas can help in the
overall transaction process and strategy by revealing interdependencies and value
creation potential. The current research points out that the real option application
provides an adequate practical approach for synergy valuation. Therefore, the
third proposition has been justified quantitatively with an application of BSOPM
and BOPL techniques. To sum up theoretical and managerial contribution, the
relationship among developed proposition is given in Fig. 1.
Figure 1 illustrates the likely relationships among the main construct presented
in the paper, with dynamic capabilities shown as an antecedent of managerial
synergies. Acquirers need to absorb and to integrate dynamic capabilities of targets
and convert M&A deal into value creation process which can be evaluated using
real options application. The proposed approach to value M&A synergy (Fig. 1) can
be used by firms before an M&A deal in the due diligence process.
5 Conclusion, Limitation, and Future Work
When some dynamic capabilities are missing, a company has the option to develop
them internally or purchase them from outside. The current paper contributes
to theory and practice by empirically illustrating how this logic works in the
M&A process. “This partnership presents an opportunity to maximize value for
Whole Foods Market’s shareholders, while at the same time extending our mission
and bringing the highest quality, experience, convenience, and innovation to our
54 A. Čirjevskis
customers” (Whitten, 2017). Whole Foods provides Amazon with an incredible

platform for the transformation of the grocery industry (HBS Working Knowledge,
2017).
The current paper also demonstrates the limitation of the real option application
to measure a dynamic capabilities-based synergy. It is difficult to validate the
synergetic effect of one isolated acquisition deal when several acquisitions happen
within the anticipation of the duration of getting synergy. Time to maturity 1 year
was assumed for the deal of Amazon-Whole Food, namely form the end of June
2017 till the end of June 2018. This was the assumption that efficient markets should
have a well-anticipated potential long-term merger gain within this period. Real
option application provided forecast on the total market capitalization of Amazon
1 year after, namely $ 529.6 bl.
However, the real market capitalization of Amazon after 1 year was $ 805.72
bn on 27.06.2018 (YCharts, 2020). The differences can be explained by exploring
many M&A deals of Amazon within the period June 2017 to June 2018 which
would have provided synergies and added much more market value to the merging
organization (Wikipedia, 2020). In this vein, more research is needed to justify
the developed proposition. Moreover, the paper, being of an exploratory and
interpretive, raises several opportunities for future research, both in terms of theory
development and findings validation.
Three propositions discussed in the paper can be used to generate several
hypotheses for further empirical testing using a broader sample and quantitative
research methods. Certainly, the testing of the propositions presented here should
help determine the applicability of real options valuation to the M&A deals and
bring this emerging theory closer to the dynamic capabilities’ framework.
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Raising Rivals’ Costs When
the Downstream Firms Compete
in Stackelberg Fashion
Jacek Prokop and Adam Karbowski
Abstract The aim of this paper is to investigate the raising rivals’ cost effect when
the downstream competition follows Stackelberg pattern. We find that the raising
rivals’ cost effect occurs in such a market setup, and the effect is asymmetric. It
means that the leader can via the unit R&D investment raise the overall marginal
cost of the follower from 1/3 to 1/2, depending on the R&D externalities. The
follower can, in turn, via the unit R&D investment raise the overall marginal cost
of the leader from 1/6 to 1/2, depending on the R&D spillovers in the industry. We
also find that under downstream Stackelberg competition, the larger R&D spillovers
lead to the smaller R&D investment as well as the profit of the upstream firm, but
the profits of the downstream Stackelberg follower are increasing with the larger
R&D externalities. The behavior of output, prices of intermediate and final products
as well as the profit of the downstream Stackelberg leader are nonmonotonic with
respect to the research externalities. Comparing with the downstream monopoly,
we conclude that downstream duopolists jointly invest more in R&D than does a
downstream monopolist as long as the R&D spillovers are not very high. The profit
of the downstream monopolist is higher than the joint profit of the downstream
Stackelberg duopolists for any level of the R&D spillovers. However, the profit of
the upstream firm is significantly lower when the downstream market is captured by
a monopolist.
Keywords R&D investment · Vertical relations · Stackelberg competition ·

Downstream monopoly
JEL Classification: L1, L2, O3
J. Prokop () · A. Karbowski

Department of Business Economics, SGH Warsaw School of Economics, Warsaw, Poland
e-mail: jacek.prokop@sgh.waw.pl; jproko@sgh.waw.pl; adam.karbowski@sgh.waw.pl

https://doi.org/10.1007/978-3-030-63970-9_4
58 J. Prokop and A. Karbowski
1 Introduction
Geroski (1992), Harabi (2002) or, more recently, Ge, Hu, and Xia (2014) observe
that vertical R&D investments may perform better than the horizontal ones.
Moreover, vertical R&D investment is a more frequent mode of operations than
the horizontal R&D investment (Arranz & de Arroyabe, 2008; Dai, Zhang, &
Tang, 2017; Ge et al., 2014; Karbowski & Prokop, 2019). However, as Banerjee
and Lin (2003) notice, theoretical industrial organization papers on firms’ R&D
concentrate on horizontal relations between enterprises. The works on firms’ R&D
in vertical setting are quite scarce (Arranz & de Arroyabe, 2008; Atallah, 2002; Dai
et al., 2017; Ishii, 2004; Karbowski, 2019; Manasakis, Petrakis, & Zikos, 2014;
Steurs, 1995; Xu, Liang, Duan, & Xiao, 2015) and usually they only compare
firms’ R&D investments under different R&D regimes, i.e., R&D competition, R&D
cooperation, research joint venture (RJV) competition, and RJV cooperation.
Kamien, Muller, and Zang (1992) distinguished four different regimes of R&D
mentioned above (see also Capuano & Grassi, 2019; Karbowski & Prokop, 2019).
In R&D competition, firms decide on their R&D investments unilaterally in order to
maximize their individual economic profits. In R&D cooperation, firms coordinate
their R&D investments, but compete in the final product market, in order to
maximize the sum of their economic profits. In RJV competition, firms behave as
in the R&D competition, but the results of R&D works are fully shared (knowledge
sharing occurs). In RJV cooperation, firms share their knowledge and at the same
time coordinate their R&D investments in order to maximize the sum of their overall
profits.
It is worth noticing that firms’ vertical R&D investment decisions are particular
due to the existence of both positive and negative R&D externalities (Arrow,
1962; Geroski, 1995; Glaeser, Kallal, Scheinkman, & Shleifer, 1992; Jacobs, 1969;
Marshall, 1890; Porter, 1990; Romer, 1986). In horizontal process R&D, the
investments made by one firm lead to the reduction of the manufacturing costs of
the rivals (d’Aspremont & Jacquemin, 1988; Kamien et al., 1992; Kamien & Zang,
2000). In vertical case, the investments made by a downstream firm also reduce the
manufacturing costs of the rivals via R&D spillovers, but at the same time increase
the demand for an input (component), allowing the upstream enterprise to raise
the input price (Banerjee & Lin, 2003; Karbowski, 2019). The rise in component
price exerts a negative impact on the manufacturing costs of the downstream rivals.
This ‘raising rivals’ costs’ effect is often used by downstream firms to gain a cost
advantage over the downstream competitors (Banerjee & Lin, 2003; Karbowski,
2019).
The raising rivals’ cost effect mentioned above has been observed for vertical
structures with downstream Cournot competition (Banerjee & Lin, 2003; Kar-
bowski, 2019). Such a structure is however observed not very often in real world
market setups. Usually, we downstream enterprises face various asymmetries, and
this leads to the formation of the downstream leader and downstream followers
(Karbowski & Prokop, 2018).
Raising Rivals’ Costs When the Downstream Firms Compete in Stackelberg Fashion 59
The aim of this paper is to investigate the raising rivals’ cost effect in the R&D-
investing industry, when the downstream competition follows Stackelberg pattern.
For simplicity, we focus on the case of a downstream duopoly and one upstream
supplier.
The paper is organized as follows. In the next section, we model the behavior
of firms in the non-integrated supply chain, when the downstream firms compete
according to Stackelberg model. For comparison, Sect. 3 considers the case of a
downstream monopoly. Conclusions follow.
2 Stackelberg Competition
Consider an industry composed of one upstream firm, U, and two downstream

firms, denoted 1 and 2. The upstream firm supplies an intermediate good to the
downstream firms at the price w. We normalize the costs of the upstream firm to
zero (Banerjee & Lin, 2003).
The downstream firms manufacture q1 and q2 units of a homogeneous final
product, respectively. The production of each unit of the final good requires one
unit of the intermediate good purchased from the upstream firm.
The market demand for the final product is given as a linear price function
p = a − q1 − q2 , (1)
where p denotes the market price, Q = q1 + q2 is the volume of total production of

the industry, while a (a > 0) is a given market parameter.
Each of the downstream companies is characterized by a linear function of the
total manufacturing costs

Ci qi , xi , xj = c − xi − βxj qi , (2)
where c (c < a) is a given parameter of an initial efficiency of firm i, xi denotes the

amount of R&D investments made by the company i, and xj denotes the amount
of R&D investments made by the competitor. Parameter β (0 ≤ β ≤ 1) determines
the size of R&D externalities, i.e., the benefits for a given company obtained as
a result of research undertaken by the competitor. Higher level of β means that
the R&D investments made by one company allow the competitor to reduce the
manufacturing costs by a greater amount for free (Prokop & Karbowski, 2013).
Let w be the price of the intermediate good.
The costs of the R&D investments have a form of quadratic function
xi2
γ , (3)
2
where γ (γ > 0) is a given parameter. The entry barriers to the industry are viewed
as too high for new enterprises to enter.
We assume that in this industry one company, say firm 1, plays the role of the
Stackelberg leader, and the other one, say firm 2, is the follower. Thus, firm 1 is the
first to set the level of its supply (q1 ), and firm 2, given the production level set by
the leader, decides about its own output level (q2 ).
The game proceeds in two stages. At the first stage, both companies simul-
taneously and independently decide about their levels of R&D investments (xi ).
These decisions affect the function of total manufacturing costs of each firm. At
the second stage, the companies compete in the final product market according to
the Stackelberg leadership model (Karbowski & Prokop, 2018).
Consider the profit of the follower firm at the second stage of the game for a
given amount of R&D investments, x1 and x2
x22
π2 = (a − Q) q2 − (c − x2 − βx1 + w) q2 − γ . (4)
2
For a given output level of the leader (q1 ), the follower maximizes its own profit
by setting the production level at
1
(a − c − w − q1 + βx1 + x2 ) . (5)
2
Taking into account the follower’s reaction given by (5), the leader maximizes
its own profit, with a given size of x1 and x2
x12
π1 = (a − Q) q1 − (c − x1 − βx2 − w) q1 − γ . (6)
2
The optimal production volume of the leader is given by
1
q1 = (a − c − w + (2 − β) x1 + (2β − 1) x2 ) . (7)
2
Substituting (7) into (5), we obtain the optimal output level of the follower
1
q2 = (a − c − w + (3β − 2) x1 + (3 − 2β) x2 ) . (8)
4
Given the R&D investments and the price of the intermediate good, w, the
production levels q1 and q2 given by (7) and (8) constitute the Nash-Stackelberg
equilibrium. The derived demand for the intermediate product is thus
1
Q= (3a − 3c − 3w + (2 + β) x1 + (1 + 2β) x2 ) , (9)
4
or equivalently,
1
w= (3a − 3c − 4Q + 2x1 + βx1 + (1 + 2β) x2 ) . (10)
3
The upstream firm sets the price of the intermediate good at the monopoly level
by maximizing π U = w · Q
1
w∗ = (3a − 3c + (2 + β) x1 + (1 + 2β) x2 ) . (11)
6
Thus, the equilibrium aggregate output is given as
1
Q∗ = (3a − 3c + (2 + β) x1 + (1 + 2β) x2 ) . (12)
8
Note, that overall marginal cost of a downstream firm 1 is
1
w ∗ + c − x1 = (3 (a + c) + (−4 + β) x1 + (1 + 2β) x2 ) . (13)
6
Thus,
∂ (w ∗ + c − x1 ) 1
= − (4 − β) , (14)
∂x1 6
and
∂ (w ∗ + c − x1 ) 1
= (1 + 2β) . (15)
∂x2 6
The above result may be summarized as the lemma below.

Lemma 1
(a) A unit reduction in the leader firm’s marginal cost decreases its overall marginal
cost by 16 (4 − β).
(b) A unit reduction in the follower firm’s marginal cost raises the overall marginal
cost of the leader firm by 16 (1 + 2β).
The overall marginal cost of a downstream firm 2 is
1
w ∗ + c − x2 = (3 (a + c) + (2 + β) x1 + (−5 + 2β) x2 ) . (16)
6
Thus,
∂ (w ∗ + c − x2 ) 1
= (2 + β) , (17)
∂x1 6
and
∂ (w ∗ + c − x2 ) 1
= − (5 − 2β) . (18)
∂x2 6
Based on the above result, we formulate the next lemma.

Lemma 2
(a) A unit reduction in the leader firm’s marginal cost raises the overall marginal
cost of the follower firm by 16 (2 + β).
(b) A unit reduction in follower firm’s marginal cost decreases its overall marginal
cost by 16 (5 − 2β).
We may restate the above lemmas as the following property.
Property
(a) A unit reduction in the leader firm’s marginal cost decreases its overall marginal
cost by 16 (4 − β) and raises the overall marginal cost of the follower firm by
6 (2 + β).
1
(b) A unit reduction in follower firm’s marginal cost decreases its overall marginal
cost by 16 (5 − 2β) and raises the overall marginal cost of the leader firm by
6 (1 + 2β).
1
Substituting for w* given by (11) into (7) and (8), we obtain the quantities offered
by the downstream firms
1
q1 = (3 (a − c) + (10 − 7β) x1 + (−7 + 10β) x2 ) , (19)
12
1
q2 = (3 (a − c) + (−14 + 17β) x1 + (17 − 14β) x2 ) . (20)
24
The corresponding profits are
1
π1 = 100 − 140β + 49β 2 − 144γ x12 − 2 (−10 + 7β) x1 (3 (a − c)
288

+ (−7 + 10β) x2 ) + (3 (a − c) + (−7 + 10β) x2 )2 ,
(21)
1
π2 = 9(a − c)2 + (14 − 17β)2 x12 − 6 (a − c) (−17 + 14β) x2
576

+ 289 − 476β + 196β 2 − 288γ x22 + 2 (−14 + 17β) x1 (3 (a − c)

+ (17 − 14β) x2 ) .
(22)
At the R&D stage each firm chooses xi to maximize its profit. The equilibrium
R&D investments for each downstream firm are given, respectively, by

(a − c) (−10 + 7β) 17 − 31β + 14β 2 − 12γ
x1 = − ,
−170 − 259β 3 + 98β 4 + 978γ − 576γ 2 + 12β 2 (6 + 49γ ) − 7β (−37 + 216γ )
(23)

(a − c) (−17 + 14β) 10 − 17β + 7β 2 − 6γ
x2 = − .
−170 − 259β 3 + 98β 4 + 978γ − 576γ 2 + 12β 2 (6 + 49γ ) − 7β (−37 + 216γ )
(24)
The profit of each downstream firm is
2
(a − c)2 100 − 140β + 49β 2 − 144γ 17 − 31β + 14β 2 − 12γ γ
π1 = − 2 ,
2 170 + 259β 3 − 98β 4 − 978γ + 576γ 2 − 12β 2 (6 + 49γ ) + 7β (−37 + 216γ )
(25)
2
(a−c)2 289−476β+196β 2 −288γ 10−17β+7β 2 −6γ γ
π2 = − 2 .
2 170+259β 3 −98β 4 −978γ +576γ 2 −12β 2 (6+49γ ) +7β (−37+216γ )
(26)
The upstream supplier’s profit is
2
1728(a−c)2 9−16β+7β 2 −6γ γ 2
πU = 2 .
170+259β 3 −98β 4 −978γ +576γ 2 −12β 2 (6 + 49γ ) +7β (−37 + 216γ )
(27)
Table 1 provides the results of numerical analysis of equilibrium for the

parameters a = 100, c = 10, γ = 10, and various levels of parameter β.
Table 1 Equilibrium in the case of downstream Stackelberg duopoly for a = 100, c = 10, γ = 10,
and β ∈ [0, 1]
β x1 x2 q1 q2 p w π1 π2 πu
0.0 1.931650 1.594080 23.1798 11.2523 65.5678 45.9096 249.996 113.910 1580.77
0.1 1.794700 1.466880 23.1575 11.2837 65.5589 45.9215 252.029 116.563 1581.59
0.2 1.657680 1.338310 23.1304 11.3097 65.5599 45.9201 253.768 118.954 1581.49
0.3 1.520630 1.208610 23.0982 11.3307 65.5711 45.9052 255.202 121.081 1580.47
0.4 1.383640 1.077960 23.0607 11.3469 65.5924 45.8768 256.326 122.943 1578.51
0.5 1.246790 0.946556 23.0176 11.3587 65.6237 45.835 257.132 124.540 1575.64
0.6 1.110150 0.814571 22.9687 11.3661 65.6652 45.7797 257.618 125.871 1571.84
0.7 0.973840 0.682166 22.9139 11.3694 65.7167 45.7111 257.781 126.937 1567.13
0.8 0.837945 0.549493 22.8530 11.3688 65.7781 45.6292 257.620 127.741 1561.51
0.9 0.702571 0.416697 22.7861 11.3645 65.8495 45.5340 257.135 128.283 1555.01
1.0 0.567823 0.283912 22.7129 11.3565 65.9306 45.4259 256.327 128.566 1547.63
Source: own calculations
Table 1 shows that with the larger level of research spillovers, the R&D
investments as well as the profits of the upstream firm are falling, but the profits
of the downstream Stackelberg follower are increasing.
The behavior of output, prices of intermediate and final products as well as the
profit of the downstream Stackelberg leader are nonmonotonic with respect to the
research externalities. The highest profit of the downstream Stackelberg leader is
achieved when the R&D spillovers are at the level β = 0.7.
3 Successive Monopoly
In this section, for comparative purposes, we investigate the firms’ R&D invest-
ments, product prices and quantities, as well as firms’ profits under downstream
monopoly which eliminates the raising rivals’ cost effect.
The profit of a downstream monopolist is
2
xM
πM = (a − qM ) qM − (c − xM + w) qM − γ . (28)
2
The optimal production volume of the downstream monopolist is given by
1
qM = (a − c − w + xM ) . (29)
2
Given the R&D investment xM and the price of the intermediate good w, the
production level of the intermediate product is determined by (29). Thus, the price
of the intermediate product could be expressed by
w = a − c − 2qM + xM . (30)
The upstream firm sets the price of the intermediate good at the monopoly level
by maximizing π U = w · qM
1
w = (a − c + xM ) . (31)
2
Then, the quantity of the intermediate product as well as the quantity of the output
offered by the downstream firm is given by
1
qM = (a − c + xM ) . (32)
4
The profit of the downstream monopolist is
1
πM = (a − c)2 + 2 (a − c) xM + (1 − 8γ ) xM
2
. (33)
16
At the R&D stage, the downstream monopolist chooses xM to maximize its profit.
Thus, the equilibrium investments are obtained as
a−c
xM = . (34)
−1 + 8γ
The profit of the downstream monopolist is
(a − c)2 γ
πM = . (35)
−2 + 16γ
The upstream supplier’s profit is
8(a − c)2 γ 2
πU = . (36)
(1 − 8γ )2
From Tables 1 and 2, it follows that downstream duopolists jointly invest more
in R&D than does a downstream monopolist as long as the R&D spillovers are not
very high (β ≤ 0.8). When β is getting closer to 1.0, the downstream monopolist
invests more than the downstream duopolists together.
Table 2 Equilibrium in the case of downstream monopoly for a = 100, c = 10, and γ = 10
xM qM pM wM πM πu
1.13924 22.7848 77.2152 45.5696 512.658 1038.3
Source: own calculations
The profit of the downstream monopolist is higher than the joint profit of the
downstream Stackelberg duopolists for any level of the R&D spillovers. However,
the profit of the upstream firm is significantly lower when the downstream market
is captured by a monopolist.
4 Conclusions
In this paper, we investigated the raising rivals’ cost effect in the supply chain, when
the downstream competition follows Stackelberg pattern. The raising rivals’ cost
effect occurs in such a market setup, and the effect is asymmetric. It means that
the leader can via the unit R&D investment raise the overall marginal cost of the
follower from 1/3 to 1/2, depending on the R&D externalities in the industry. The
follower can, in turn, via the unit R&D investment raise the overall marginal cost of
the leader from 1/6 to 1/2, depending on the R&D spillovers in the industry.
Under downstream Stackelberg competition, the larger R&D spillovers lead to
the smaller R&D investment as well as the profit of the upstream firm, but the
profits of the downstream Stackelberg follower are increasing with the larger R&D
externalities. The behavior of output, prices of intermediate and final products
as well as the profit of the downstream Stackelberg leader are nonmonotonic
with respect to the research externalities. The highest profit of the downstream
Stackelberg leader is achieved when the R&D spillovers are at the level β = 0.7.
Comparing with the downstream monopoly, we can conclude that downstream
duopolists jointly invest more in R&D than does a downstream monopolist as long
as the R&D spillovers are not very high (β ≤ 0.8). When β is getting closer to 1.0,
the downstream monopolist invests more than the downstream duopolists together.
The profit of the downstream monopolist is higher than the joint profit of the
downstream Stackelberg duopolists for any level of the R&D spillovers. However,
the profit of the upstream firm is significantly lower when the downstream market
is captured by a monopolist.
Acknowledgment This research was supported by National Science Centre, Poland (grant
number UMO-2017/25/B/HS4/01632).
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Comparing Five Generational Cohorts
on Their Sustainable Food Consumption
Patterns: Recommendations for
Improvement Through Marketing
Communication
Irene Kamenidou, Spyridon Mamalis, Ifigeneia Mylona,

and Evangelia Zoi Bara
Abstract Contemporary food consumption patterns are regarded as one cause

of environmental deprivation, so new sustainable food consumption patterns are
vital for this world’s future. This paper presents the results of field research that
studies the sustainable food consumption patterns of five generational cohorts,
namely Generation Z, Generation Y, Generation X, Baby Boomers, and the Silent
Generation. Specifically, it explores if the subjects of the five generational cohorts
(N = 1561) have adopted or are willing to adopt sustainable food consumption
behavior. Additionally, it investigates differences amongst the generational cohort’s
sustainable food consumption behavior.
Keywords Sustainable food consumption · Generations · Generational cohorts ·

Sustainability · Communication · Marketing · Consumer behavior
JEL Classification: M31, M37, M38
1 Introduction
Climate change and pressures exerted on the environment due to the long-standing
human activity such as extensive land, and water exploitation has resulted in
degradation of ecosystems (Siardos & Koutsouris, 2011; UNDP, 2012, p. 1), thus
raising the issue of sustainability. The concepts of sustainability and sustainable
development were introduced in 1987 by the Brundtland Commission of the United
I. Kamenidou () · S. Mamalis · I. Mylona · E. Z. Bara

Department of Management Science and Technology, School of Business and Economics,
International Hellenic University, Agios Loukas, Kavala, Greece
e-mail: rkam@mst.ihu.gr; mamalis@econ.auth.gr; imylona@mst.ihu.gr; evaeva13@hotmail.gr

https://doi.org/10.1007/978-3-030-63970-9_5
70 I. Kamenidou et al.
Nations, while sustainable consumption was introduced in 1992 in the United

Nations Conference on Environment and Development (UNCED), Agenda 21
(United Nations, 1992, p. 18). Since then, the intention of achieving a sustainable
world through different parameters such as sustainable development, sustainable
tourism, and sustainable consumption is consistently in focus. In 1994, the Oslo
Roundtable on Sustainable Production and Consumption Symposium defined sus-
tainable consumption as “the use of goods and services that respond to basic needs
and bring a better quality of life, while minimizing the use of natural resources,
toxic materials and emissions of waste and pollutants over the life cycle, so as
not to jeopardize the needs of future generations” (Oslo Roundtable on Sustainable
Production and Consumption, 1994).
Meulenberg (2003) asserts that sustainable consumption is a practice based on
the individuals’ decision-making process, taking into account the social responsi-
bility of the consumer and their personal needs and desires.
Sustainable food consumption behavior (SFCB) is a critical topic of sustainable
consumption and is of high interest due to its multiple impacts (Reisch, Eberle, &
Lorek, 2013). Moreover, due to its importance, continuous emerging research has
focused on consumers and households’ SFCB (Grebitus, Steiner, & Veeman, 2012;
Han & Hansen, 2012; Hunecke & Richter, 2017).
While many academic papers are focusing on sustainable food consumption
(SFC) (Reisch et al., 2013; Thøgersen, 2017; Vanhonacker, Van Loo, Gellynck,
& Verbeke, 2013), there is no single accepted definition (Annunziata & Scarpato,
2014; Reisch et al., 2013). Nonetheless, SFC is a result of sustainable food
choices and sustainable food diets (U.K. Parliament, 2011). According to FAO
(2010), “Sustainable Diets are those diets with low environmental impacts which
contribute to food and nutrition security and healthy life for present and future
generations. Sustainable diets are protective and respectful of biodiversity and
ecosystems, culturally acceptable, accessible, economically fair and affordable,
nutritionally adequate, safe, and healthy; while optimizing natural and human
resources.” As Meybeck and Gitz (2017, p. 1) state, a sustainable diet “combines
two different perspectives: a nutrition perspective, focused on individuals, and a
global sustainability perspective, in all its dimensions: environmental, economic and
social.”
SFC has been connected to diverse consumption elements, such as consuming
local products and decreasing the consumption of meat and processed products
(Redman & Redman, 2014). SFC also incorporates the increase of fruit and
vegetable consumption (Carlsson-Kanyama & González, 2009), and generally
consuming food that has a small ecological, carbon, and water footprint.
Having all the above in mind, the focus of this paper is to examine the SFCB of
five generational cohorts in Greece, namely Generation Z, Generation Y, Generation
X, Baby Boomers, and the Silent Generation. Additionally, it explores existing
differences in the SFC of these generational cohorts. Studying these generational
cohorts is of great significance since they reflect almost the total adult population,
and therefore this study explores the SFCB that the country engages in.
Comparing Five Generational Cohorts on Their Sustainable Food Consumption. . . 71
2 Literature Review
SFC has been extensively studied, although it is a relatively new subject of research
(after the 1994 Oslo Roundtable on Sustainable Production and Consumption). SFC
has been studied from different points of view, such as fair trade (Tanner & Wölfing
Kast, 2003), animal welfare (Clonan, Holdsworth, Swift, & Wilson, 2010), the
environmental impact of food production, marketing, and consumption (Iribarren,
Hospido, Moreira, & Feijoo, 2010). Consumer behavior studies on SFC focus on
meat consumption reduction (de Bakker & Dagevos, 2012), or/and consumption of
locally produced products (Wallgren & Höjer, 2009). Also, there is a bulk of studies
focusing on the consumption of organic foods as means of SFC patterns (e.g.,
Thøgersen, 2010; Vittersø & Tangeland, 2015); waste behavior (Clemente, Pérez-
Sánchez, Ribal, Sanjuán, & Escobar, 2013), attitudes, intentions, involvement,
perceptions, and motives towards/for employing SFCB (Jackson, 2005; Pickett-
Baker & Ozaki, 2008; Vermeir & Verbeke, 2006), or barriers to adopting an SFCB
(Robinson & Smith, 2002). Moreover, consumer characteristics and their effect on
SFC have been studied too (Diamantopoulos, Schlegelmilch, Sinkovics, & Bohlen,
2003; Vanhonacker et al., 2013; Verain et al., 2012), providing conflicting results
as to their impact on SFCB. Besides these themes, segmentation analysis based on
SFC (De Maya, López-López, & Munuera, 2011; Vanhonacker et al., 2013) has also
been studied. The above consists of only a few areas of research that regards SFC
behavior.
Regarding generational cohorts and SFC, the majority of the studies focus on
Generation Y (or Millennials), studying food in general (Happonen, 2016; Mohd
Suki & Mohd Suki, 2015), organic foods (Leong & Paim, 2015; Thambiah, Khin,
Muthaiyah, & Yen, 2015), or organic wine (Pomarici, Amato, & Vecchio, 2016).
As to Generation Z, few studies deal with SFC in general (Kamenidou, Mamalis,
Pavlidis, & Bara, 2019; Su, Tsai, Chen, & Lv, 2019), though, no study was found
that focused solely on Baby Boomers, Generation X, or the Silent Generation.
However, a handful of studies focus on multiple generations simultaneously, such
as Generation Z and Y (Zalega, 2019), or five cohorts, such as Vilceanu, Grasso,
and Johnson (2019), with data for the latter from the Simmons OneView Research
NHCS survey.
3 Methodology
This research targets five generational cohorts in Greece: Generation Z, Generation

Y, Generation X, the Baby Boomers, and the Silent Generation. The generational
cohort theory states that people born in the same year range, at similar places, and
have lived through the same life-changing events during their coming years (17–
23 years old) belong in the same generational cohort (Mannheim, 1952). Previous
researchers (e.g., Williams & Page, 2011) have intensively studied each cohort’s
consumer characteristics. Since researchers do not agree on the year range of each
cohort, this study follows the time range adopted by Kamenidou, Mamalis, Pavlidis,
and Bara (2018) because it refers to the same country.
Field research was realized for this study. The field research questionnaire was
adopted from an extensive literature review and had qualitative follow-up research to
verify the items for the research in Greece. Items regarding the question of engaging
in specific SFC patterns were stemmed from the studies of Tobler, Visschers, and
Siegrist (2011) and Vanhonacker et al. (2013), while three items came from the
qualitative research implemented. The scale used was adopted from Kamenidou
et al. (2019), employing a seven-point Likert-type scale. The ranking used was as
follows: 1 = I am not doing this, and I am not willing to do it ever, 2 = I am not
doing this, and I am not willing to do so in the far future (long run), 3 = I am not
doing this, and I am not willing to do this in the near future, 4 = I am not doing
this and will think about it in the future if I will do it (neutral), 5 = I am doing this
occasionally (whenever I can), 6 = I am doing this already very often, 7 = I am
already doing this, and I consider that I will continue doing it forever. Additionally,
socioeconomic, and demographic questions of participants were also included.
The questionnaire was forwarded via different roots (Facebook, e-mail, printed
handouts, and personal interviews) depending on the targeted age, employing a
non-probability sampling method. By this procedure, 1561 valid questionnaires
were gathered and considered appropriate for the analysis. The statistical package
SPSS ver.24 for windows was used, applying descriptive analysis, reliability,
factor analysis with varimax rotation, One-Way ANOVA, model, and multiple
comparisons of means.
Ethical approval: There are no ethical issues involved in the processing of the
questionnaire data used in the study. The necessary consents have been obtained by
the persons involved, and the anonymity of the participants has been secured. All
procedures performed in studies involving human participants were in accordance
with the ethical standards of the International Hellenic’s University research
committee and with the 1964 Helsinki declaration and its later amendments or
comparable ethical standards.
4 Results: Discussion
4.1 Sample Profile
As to gender, 47.3% were males and 52.7% females. Regarding generational

cohorts, 24.1%, 27.4%, 15.5%, 20.1%, and 12.9% belonged in Generation Z,
Generation Y, Generation X, Baby Boomers, and the Silent Generation, respectively.
Also, 40.2% were single, 48.6% married, and 11.2% were divorced or widowed.
As to education, 13.6%, 45.3%, and 12.2% had elementary education, secondary
education, and post-secondary, respectively. Additionally, 29.0% had a graduate or
postgraduate education. As to the participants’ profession, 28.8% were employees

(federal and private), 17.6% were businessmen, 3.1% are laborers, 21.2% were
on a pension, and 29.4% were dependent on others (students, housekeepers, and
unemployed). Lastly, as to participants’ income (net family income per month),
5.1% are considered with a very low income (<350.00A C per month). Specifically,
35.7%, 44.1%, and 11.7% had a family income of 350.01–1000.00A C, 1000.01–
2000.00AC, and 2000.01–3000.00A C, respectively. Lastly, a very small percent (3.4%)
had a net family income per month, exceeding 3000A C.
4.2 Sustainable Food Consumption Patterns per Generational

Cohort and for the Total Sample
Table 1 presents the mean scores (M.S.) of the 15 items that refer to SFC behavior
for each generational cohort and the total sample (TS). From Table 1, it is evident
that the older generational cohorts are adopting SFC behavior compared to the
younger ones. Specifically, the Silent Generation is the one that has the highest mean
scores for 10 out of 15 SFC practices. Moreover, the younger generational cohorts
Table 1 SFC patterns by generational cohort and total sample (M.S.)

Items Gen Z Gen Y Gen X BB SG TS
Avoid food products with excessive 4.01 4.00 4.34 4.22 4.54 4.16
packaging
Purchase regional food 4.85 4.92 5.45 5.25 5.21 5.09
Avoid food products that were imported by 3.80 4.00 4.31 4.10 4.47 4.08
airplane
Eat only seasonal fruits and vegetables 5.19 5.17 5.44 5.45 5.29 5.29
Buy organic food 4.19 4.35 4.80 4.68 4.96 4.52
Eat less meat (maximum once or twice per 4.09 4.38 4.49 4.65 4.86 4.44
week)
Avoid consumption of any imported 3.97 4.30 4.74 4.50 4.63 4.37
agricultural products and foodstuffs
Avoid buying or consuming ready-made 4.20 4.29 4.67 4.68 4.92 4.48
prepacked foods
Purchase fruits and vegetables in bulk form 4.76 4.73 5.10 5.00 5.14 4.90
Consume sustainably farmed fish 3.97 4.14 4.50 4.55 4.46 4.28
Consume meat types with lower 3.99 4.19 4.55 4.45 4.61 4.30
environmental impact
Consume organic meat 3.96 3.92 4.48 4.36 4.57 4.18
Consume hybrid meat types 3.16 3.09 3.02 3.15 3.60 3.17
Consume plant-based meat substitutes 3.50 3.61 3.70 3.54 3.42 3.56
Consume protein from insects 2.50 2.78 2.53 2.41 2.85 2.61
Source: The authors; sample: 1561
(Generation Z and Generation Y) have the lowest. For the ways to substitute protein
from meat, all cohorts have low M.S., meaning that they will not, now or in the
future, substitute meat protein by these practices.
4.3 Factor Analysis—Segmentation Based on SFC Patterns
Exploratory Factor Analysis with varimax rotation was performed on the SFC
patterns (15 items). The analysis indicated that three factors have eigenvalue
over one (E.V. > 1). Therefore, three factors were extracted (KMO = 0.904;
BTS = 11,155,288; df = 105; p = 0.000). These factors account for 61.8% of
Total Variance (T.V.), and the reliability coefficient alpha value of the total scale
(15 items) is Cronbach α = 0.897, which is considered satisfactory (Spector, 1992).
The first factor is named “Abstaining food consumption patterns,” explaining
23.0% of T.V. This construct consists of six items, four of which are patterns that
avoid specific consumption behavior. This factor has a mean factor score (MFS)
MFS = 4.28 (StD = 1.23), and the reliability coefficient alpha value of the factor is
α = 0.848.
The second factor is named “Obtaining sustainable food consumption patterns.”
It explains 22.8% of T.V. and comprises of five items that are directly associated
with the (desired) consumption patterns of sustainable food products. This factor
has MFS = 4.74 (StD = 1.21), and the reliability coefficient alpha value of the
factor is α = 0.848 too.
Lastly, the third factor is named “Consuming meat protein substitutes.” This
factor explains 16.0% of T.V. and consists of three items, referring to ways for
substituting protein intake from meat. This factor has MFS = 3.11 (StD = 1.39), and
the reliability coefficient alpha value of the factor is α = 0.774. The three MFS of the
abovementioned extracted factors were used as new variables for further analysis.
4.4 Hypotheses Testing
The main hypothesis of this research is that generational cohorts differ in SFC
behavior. Hence, three separate hypotheses arise from this broad hypothesis, which
is formed due to the three factors/constructs extracted from factor analysis. These
three hypotheses are defined as follows:
Hypothesis N.1
H1 = There are differences between generational cohorts and their SFC behavior,
and specifically in terms of abstaining food consumption patterns. This hypothesis
is presented statistically as:
H10 = There are no statistically significant differences between the generational
cohorts and abstaining food consumption patterns (a = 0.05).
Table 2 ANOVA tests between SFC constructs and generational cohorts

SFC constructs Sum of squares df Mean square F Sig.
Abstaining food Between groups 78.735 4 19.684 13.379 .000
consumption Within groups 2289.291 1556 1.471
patterns Total 2368.026 1560
Obtaining Between groups 65.315 4 16.329 11.513 .000
sustainable food
consumption Within groups 2206.890 1556 1.418
patterns Total 2272.205 1560
Consuming meat Between groups 10.606 4 2.652 1.382 .238
protein substitutes Within groups 2984.909 1556 1.918
Total 2995.516 1560
Source: The authors
H11 = There are statistically significant differences between the generational

cohorts and abstaining food consumption patterns (a = 0.05).
Hypothesis N.2:
specifically in SFC patterns. This hypothesis is presented statistically as:
cohorts and obtaining SFC patterns (a = 0.05).
cohorts and obtaining SFC patterns (a = 0.05).
Lastly, hypothesis N.3 is as follows:
and specifically in terms of consuming meat protein substitutes, which is presented
as follows:
cohorts and consuming meat protein substitutes (a = 0.05).
cohorts and consuming meat protein substitutes (a = 0.05).
Table 2 presents the results of the hypotheses testing the One-Way ANOVA
model. In all cases, the three constructs of SFC behavior were the dependent
variable, and the generational cohorts were the independent variable.
Concerning the first hypothesis, the One-Way ANOVA test revealed significant
differences between generational cohorts [F (4.1556) = 19.684, p < 0.001].
Consequently, the null hypothesis is rejected. As regards the second hypothesis, the
One-Way ANOVA test also unveiled significant differences between generational
cohorts [F (4.1556) = 16.329, p < 0.001]. Henceforth, the null hypothesis is rejected
too. Lastly, referring to the third hypothesis, One-Way ANOVA did not reveal
significant differences between generational cohorts [F (4.1556) = 2.652, p > 0.05].
As a result, the null hypothesis cannot be rejected.
Table 3 Tuckey B test between SFC and generational cohorts

Constructs of SFC Gen Z Gen Y Gen X Baby boomers Silent generation
Abstaining food consumption 3.99b 4.15b 4.52a 4.41a 4.6a
patterns
Obtaining sustainable food 4.51b 4.58b 4.96a 4.90a 5.01a
consumption patterns
Source: The authors
As the data analysis of this study reveal that in two cases (abstaining food
consumption patterns and obtaining SFC patterns), at least two cohorts differ in
their SFC behavior.
4.5 Multiple Comparison of Means
Multiple comparisons of means were conducted to investigate in-depth which

generational cohort differs from others in the above two cases where the null
hypothesis was rejected. Table 3 presents the results of the multiple comparisons
of means for the two constructs, using the post hoc Tuckey B comparisons test. In
Table 3, each row with different letters beside the mean scores reveals significant
differences, starting with “a” for the highest mean score. Therefore, numbers with
the same letters in a row reveal no statistical differences.
In respect of the first construct of SFC behavior, “Abstaining food consumption
patterns” Tuckey’s B test indicated that the mean scores for the older cohorts
are significantly higher as compared to the younger ones (Generation Z and Y).
The oldest generational cohort (Silent Generation) is the one that seems to be
more in line with these tactics as compared to the other cohorts. One reason
could be that due to their pension, which is relatively quite low (due to cut-offs
implemented by TROIKA, after the economic crisis started). Thus, they are not
willing to pay a premium price for imported food or food with a high price due to
a more luxurious or better-designed package. In this way they abstain from non-
SFC patterns. This suggestion is in line with Ang, Leong, and Kotler (2000), who
assert that consumers come to be more rational and purchase the necessary goods
under turbulent economic conditions. Additionally, Kamenidou, Rigas, and Priporas
(2018), in their research on a sample of 1305 households in Greece, found that the
economic crisis raised food insecurity issues, whereas 65.6% of the households that
participated in the study considered that the economic crisis had an impact on their
food access. On the other hand, the younger generations (Generations Z and Y)
are not prone to abstain from non-SFC patterns. This behavior could be due to the
influence of the products’ marketing cues, the probable significance of peers or they
may not be ecologically conscious to the point that they will likely change their
consumption patterns.
Regarding the second construct, the findings suggest that the older generations
are more prone to SFC behavior. At the same time, the younger generational cohorts
(Z and Y) are less willing to do so. These findings contradict findings of previous
researchers that found that the younger generations (specifically, Generation Y) care
about the environment and are more willing to proceed to an SFCB (Gurau, 2012;
Ntanos, Michalis, & Ntanos, 2014; Organic Trade Association, 2016), while the
findings do align with those of Kamenidou et al. (2019), regarding the Generation
Z cohort.
5 Conclusions: Realizations—Limitations of the Study

and Directions for Further Research
This research aimed to investigate the SFC behavior that the Greek generational
adult cohorts hold, seeking differences regarding the generational cohorts and SFC
behavior. This research revealed that the older generational cohorts are those prone
to SFC behavior, while the younger ones do not seem to be engaged in this
type of conduct. Additionally, differences were found regarding SFC behavior and
generational cohorts, specifically for the first and second constructs of SFC patterns
(Abstaining food consumption patterns and Obtaining SFC patterns, respectively).
Marketing communication through contemporary communication channels will
provide awareness to younger generational cohorts for the benefits of SFC behavior.
For example, the use of digital marketing could be a way for younger cohorts
to understand the benefits of SFC behavior. Social media allow marketers to
directly engage consumers in the creative process as they are active participants
instead of passive recipients (Thackeray, Neiger, Hanson, & McKenzie, 2008). The
development of social media marketing provides marketers with new opportunities,
as they can communicate with millions of young consumers and inform them about
their products and their benefits (Duffett, 2017). Social media can be used as a
powerful marketing tool for younger consumers (Mulero & Adeyeye, 2013).
This research has some restrictions that should be mentioned, such as a relatively
small sample per cohort, justified by the fact that this research is self-funded.
A larger sample in future research would be desired to validate the findings of
this research. Additional items measuring SCF behavior could be added since the
items included in the questionnaire were validated from previous literature and
qualitative research. Even though this research has the abovementioned limitations,
it is considered significant because it provides an insight into the SFC behavior
regarding five generational cohorts simultaneously, where a scarcity of studies
exists.
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The Effect of Budgetary Policies
on the Economy Activity in Algeria: A
Markov Switching Approach
Touitou Mohammed
Abstract This study aims to highlight the effect of budgetary policies on the
economy activity in Algerian for the period 1986 to 2014. Contrary to prior studies,
our analysis opts for a recent and robust technical setting within the framework
of Markov switching models. The findings indicate that a deterioration of the
balance is favorable to the activity; this situation describes a Keynesian nature
(Budget deficit helps boost economic activity). The improvement of budget balance
improves economic activity. This is the classic nature (according to the Classics, the
financing of activity by the budget deficit has a negative effect on economic activity)
according to the terminology of the study. The findings could help policymakers to
establish efficient economic decisions to boost the economy. Favorable economic
repercussions may result from an effective policy coordination in decision-making.
Keywords MS-VAR approach · Budgetary policy · Expansion · Recession
Jel Classification: E52, C32, C87, E32
1 Introduction
Budgetary policy is an instrument of economic policy. Keynesian theory states that

it can stimulate aggregate demand and revive a stagnant economy. On the other
hand, the classics (neoclassical) suggest that an expansionary budgetary policy has
no positive effect on economic activity: deficits are harmful and lead to higher
rates interest. Thus, according to the theory of rational expectations, agents make
expectations about the taxes they will have to pay in the future, which results in a
fall in private demand and supply and consequently a slowdown in activity.
T. Mohammed ()
Faculty of Economics and Business, University of Algiers 3, Road Ahmed Oueked, Dely Brahim,
Algiers, Algeria

https://doi.org/10.1007/978-3-030-63970-9_6
82 T. Mohammed
Moreover, empirical studies on the subject conducted in the 1990s have called
into question the importance of the Keynesian fiscal multiplier: these studies
have concluded that expansionary fiscal policies could have negative effects on
consumption, investment, and interest rates.
In general, the work on structural VAR modeling remains limited: Hénin
& N’Diaye1 (2001) show that in this work, innovation on the budget variable
contributes only 6–20% of the variance of the forecast error of GDP.
Other arguments suggest that the interactions between fiscal variables and
macroeconomic activity may be neither symmetrical nor homogeneous over time.
Also, of all the above, is it not justified to reformulate the interactions between
the budget deficit and the economic activity as dependent on the budgetary regime
and the conjunctural conditions? The work therefore consists of determining, by
using the Markov-Switching Vector Autoregressive (MS-VAR) approach, the effect
of budgetary policies on economic activity in Algeria.
In addition, it is a question of identifying whether the budgetary policies adopted
in the context of Algeria have a classic effect or a Keynesian effect. This study will
be conducted by using quarterly data for the period 1986–2014. To achieve this
objective, we assume that the effect of budgetary policies on the economic activity
of Algeria would depend on economic conditions (expansion or recession) and/or
the budgetary regime (deficit or balance of the budgetary balance).
2 An Empirical Review of the Literature
In recent years the economic literature has experienced the birth of a new empirical
analysis approach, namely VAR modeling. This approach is ranked among the main
works of modern macroeconomics. This methodology developed by Sims (1980)
has been essentially applied in the analyzes related to the effects of monetary shocks,
while little work has been done on the effects of budgetary shocks. It is recently
that other theoretical and empirical literatures have emerged that have focused on
the analysis of the effects of fiscal policy. The VAR Structural Approach (SVAR),
which refers to the pioneering work of Blanchard and Perotti (2002), simulates
a public spending shock on the US economy and finds a positive response from
private consumption and US GDP (the multiplier being 0.9 or 1.29 according to
the estimation method). On the other hand, a tax revenue shock negatively affects
private consumption and US GDP. They also say that private investment and imports
react negatively following a shock on public spending.
Biau and Gerard (2004), using quarterly data for the period 1978T1–2003T4,
have shown that a structural shock of public expenditure in France has a positive
1 Both authors use a methodology that is not very common in the literature to measure the effect of
budgetary policies on activity, namely the MS-VAR approach. This methodology will be presented
in this work.
The Effect of Budgetary Policies on the Economy Activity in Algeria: A. . . 83
impact on the short-term overall demand (1.4 euro) in France because the positive
effects of the shock on private demand, particularly on consumption and private
investment. The effect is decreasing and thus regains, from the second year onward,
its long-run equilibrium level due to the adjustment of economic activity to higher
prices. However, economic activity reacts negatively following a structural shock to
tax revenues; this is explained by the resulting contraction of private consumption
expenditure. This effect fades rapidly from the second quarter to return to its long-
term level.
Mihov and Fatas (2001) compare the results of a VAR model estimated for the
United States to the predictions of a neoclassical model. It follows from their study
that any increase in State consumption expenditure financed by higher taxes implies
a reduction in household consumption because of the decrease in their income. On
the other hand, their VAR model shows that a shock on overall public spending
encourages private sector investment and promotes employment.
Mountford and Uhlig (2002), using SVAR modeling, find that a shock on tax
revenues has negative effects on private consumption and US GDP, while a public
expenditure shock does not reduce consumption in United States, but has the effect
of crowding out private investment.
Badinger (2006) provides in his analysis an assessment of the effects of discre-
tionary budgetary policy in Austria during the period 1983Q1 to 2002Q4. It shows
that tax shocks have a negative effect on GDP, consumption, and investment. Public
expenditure shocks have a positive effect on production and private consumption,
but decline largely after a few years, resulting in a cumulative response close to
zero. These results are difficult to reconcile with the neoclassical prediction that
public spending negatively affects private consumption. In addition, tax shocks have
larger effects than spending shocks in some specifications. This could be due to the
fact that taxes do not only affect output through the income effect but also distortion
prices, a point emphasized in neoclassical models.
Afonso and Sousa (2009), from a Bayesian structural VAR, analyze the empirical
data of the United States, the United Kingdom, Germany, and Italy, respectively,
for the periods 1970T3-2007T4, 1964T2-2007T4, 1980T3-2006T4, and 1986T2-
2004T4. The results of this article can be summarized as follows: government-
spending shocks generally have a small effect on GDP but do not translate into
significant effects on private consumption. They affect private investment and have
no significant impact on the price level and the average cost of refinancing the debt.
Also, they have a positive but weak impact on monetary aggregates. On the other
hand, government revenue shocks have a positive (albeit lagged) effect on GDP and
private investment as a result of budgetary consolidation; but they have no impact
on the price level.
According to Reinhart (2010), the significant use of budgetary measures to
counter the global financial crisis of 2007–2009 has further boosted the debate over
the size of the budgetary multiplier. The state of public finances is rather estimated
by using the stock of current public debt and/or the size of budget deficits.
For Corsetti, Meier, and Müller (2012), a global shock to public spending
causes an increase in debt that induces, over time, a systematic reduction in the
84 T. Mohammed
government’s future spending. This is because the real interest rates are failing to
rise in response to higher public spending.
The study by Hénin and N’Diaye (2001) complements the traditional VAR
approach by taking into account the asymmetric nature of the responses of the
activity to an increase or decrease in the public deficit. For four major countries
(France, the United States, the United Kingdom, and Canada), the authors estimate
a Markov-based VAR model of regimes in order to assess the extent to which the
fiscal multiplier can depend on the conjunctural situation (expansion or recession).
The findings of the study confirm the uncertainties noted by previous studies on the
Keynesian effects of budgetary policy. The authors conclude non-Keynesian effects
of budgetary policy in the majority of cases.
Our review of the literature in this section has shown that GDP responses
to short-run fiscal policy shocks can be positive or negative depending on the
country. In addition, three channels of transmission have been identified: the public
consumption expenditure channel, the investment channel and the inflation rate
channel.
The present study draws on the study by Hénin and N’Diaye (2001) to analyze
the effect of budgetary policy on economic activity in Algeria. We will consider an
estimation of a reduced equation of activity as a function of the primary balance, and
according to expansion and recession conjunctural regimes then of cross regimes,
associating with this cyclical typology two budgetary policy: “improvement of the
balance” or “deterioration of the balance.”
3 Methodology
It should be recalled that the purpose of this work is to evaluate the extent to which
the effects of budgetary policy on activity depend on the economic phase considered
(expansion or recession) and/or the budgetary regime in terms of balance or deficit.
Thus, we first introduce the MS-VAR specifications selected for this study. We
will then present the strategy of the empirical study and finally the stationarity of
the series.
3.1 Presentation of the Model
MS-VAR models, Markov-Switching Vector Autoregressive, introduced by Hamil-

ton (1989) are used to model time series subject to discrete and occasional regime
changes. The different regimes, of a discreet nature, are stochastic and unobservable.
They thus allow the implementation of nonlinear dynamic models complex.
The specification adopted is therefore that proposed by Hamilton (1989) where
the transition between the regimes follows a Markov process.
Thus, if yt measures the cyclical gap of the activity, bt the primary budgetary
balance, the model represents the economy by the following equation:

k
k
yt = μs(t) + ϕi,s(t) yt−i + λi,s(t) bt−i + δs(t) εt (1)
i=1 i=1
It is assumed that the perturbations εt are independent, identically distributed

and follow the normal center reduced. However, the regimes are heteroscedastic;
the constant term depends on the state of the regime. There is a change in the
autoregressive component of the cyclical gap; the impact of the fiscal balance on
activity depends on the phase of the cycle.
st being the state of the economy representing the expansion or recession
(st = {0, 1}), the assumptions above allow specifying the parameters μs(t) , ϕi, s(t) ,
λi, s(t) and δ s(t) as follows:
μs(t) = α0 + α1 st
ϕi,s(t) = ϕi,0 + ϕi,1 st
λi,s(t) = λi,0 + λi,1 st
with λ< in the Keynesian case: a reduction in the balance has a stimulation on
demand and > in the classical case.
δs(t) = δ0 + δ1 st
We admit that the continuation s(t) is a Markovian process of the first order.
Pr ob (st /st−1 , st−2 . . . ) = Pr ob (st /st−1 )
Pr ob (st = 1/st−1 = 1) = P
Pr ob (st = 0/st−1 = 1) = 1 − P
Pr ob (st = 0/st−1 = 0) = q
Pr ob (st = 1/st−1 = 0) = 1 − q
86 T. Mohammed
The matrix P of the probabilities of transition is then written as follows:

P (1 − q)
P =
(1 − P ) q
The probability of leaving the regime “1” is constant and equal to 1 − p. The
average life of this regime is 1/(1 − P). The average duration of the regime “0” is
1/(1 − q). The state of symmetry is given by the condition p = q; the two regimes
in this case are then persistent.
The effect of initial conditions on the state of the system fades over time.
The probability of observing the regime “1,” independently of the intermediate
states, tends to a constant π , equal to the probability of being previously in this
regime and to remain there (pπ ) plus the probability of being previously in “0” and
getting out [(1 − q)(1 − π )] hence π = (1 − q)(2 − − p − q) also interpretable as
the unconditional probability of the regime “1.”

π π
we have : =p
1−π 1−π
The estimation of the model is based on the probability of realization of a regime

conditionally to the previous states of the system. st not being observable, this
probability must be expressed conditionally to the observation of past achievements
of variable yt ; this requires the use of a filtering algorithm.
The estimation of the model is done by maximizing the likelihood of the
observations, the state of the system constituting a latent variable whose value is
predicted by the BaumLindgren-Hamilton-Kim filter.
We can then consider a multivariate dynamics of an interest variable. We can
therefore associate with the previous model the equation of the budgetary balance
bt :

k
k
bt = vs(t) + i,s(t) yt−i + ξi,s(t) bt−i + δgs(t) ηt (2)
i=1 i=1
In the context of this study, the model (1) conditioning the impact of the balance
on activity by the cyclical phase can thus be extended to the hypothesis of a double
conditioning of the coefficient λi , on the one hand, by the economic situation (E
or R, for expansion or recession) and, on the other hand, the existing budgetary
situation characterized by the opposition between budget balance (bb) and budget
deficit (bd).
We will thus designate the four regimes of this model generalized by (Ebb,
Edb, Rbb, Rbd) of the regime “Ebb” expansion of activity and balanced budget
to the regime “Rbd” combining recession and budget deficit. The identification in
these terms of the regimes results from the empirical application of the algorithm
Esperance-Maximization (E.M.).
3.2 Strategy of the Empirical Study
The empirical exploration strategy adopted for the study, as in Hénin and N’Diaye
(2001), consists to estimate successively the three variants of the (1) specified in the
framework of a bivariate VAR. Concretely, it is about estimating the following:
– A linear model, on a single regime on the set of available samples;
– A Markovian regime change model with two conjunctural regimes (expansion
and recession, noted E and R);
– A model in the context of an MS-VAR of the joint dynamics of the cyclical gap
(1) and the balance (2) with the four conjunctural regimes (Ebb, Ebd, Rbb, Rbd).
– The criterion of identification in posteriority (Hénin & N’Diaye, 2001) is used to
identify the regimes.
The estimation is made by using the OX statistical software developed by
KROLZIG, H-M. (1998).
3.3 The Data of the Study
In our econometric analysis, we use quarterly GDP and primary balance data (as a
percentage of GDP). These data are spread over the period 1986–2014.
They come from the National Bank (NB), the World Bank (WB), the Ministry of
Finance (MF), and the National Statistics Office (NSO).
The activity variable used is a measure of the cyclical gap, i.e., the difference
between the logarithm of GDP and the stationary logarithmic component of GDP
resulting from the application of the Hodrick-Prescott filter with the weighting
coefficient λ = 1600 habitual in step quarterly. These annual data were quarterly
by the method Goldenstein and Khan (1976).
3.4 Analysis of Series Stationarity

3.4.1 The Economic Gap and Budget Balance in Algeria
The graphical representation of the two series indicates that they are high chances
of being stationary at level (Graph 1).
Dickey Fuller’s unit root test confirms this apprehension. In fact, with regard to
the economic gap, the ADF statistic = −75.7 is lower than the critical values for all
the thresholds considered as can be seen in Table 1.
Concerning the Budget Balance, the ADF statistic = −3.98 is also lower than
the critical values for all the thresholds considered (Table 2).
88 T. Mohammed
10
-5
-10
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Budget balance Economic gap
Graph 1 Evolution of the Economic gap and Budget Balance in Algeria between 1986 and 2014
Table 1 Dickey Fuller’s test on the series of economic gap of Algeria

ADF test statistic −75.72561 1% Critical Valuea −2.7628
5% Critical value −1.8945
Augmented Dickey-Fuller test equation
Dependent variable: D(EC)
Method: Least squares
Sample (adjusted): 1986:4 2014:4
Included observations: 113 after adjusting endpoints
Variable Coefficient Std. error t-statistic Prob.
EC(−1) −4.949555 0.042651 −92.60252 0.0000
D(EC(−1)) 1.971461 0.030282 65.10434 0.0000
D(EC(−2)) 0.988272 0.017576 56.22970 0.0000
Source: Authors
a MacKinnon critical values for rejection of hypothesis of a unit root
3.4.2 Determination of the Optimal Delay of the VAR
We can consider at most (p = 2) delays; it is usually sufficient, given the high

number of parameters to be estimated and the problem of the MS-VAR model.
Hénin and N’Diaye (2001) systematically set the autoregressive dimension of the
models in their study to two delays.
To retain the optimal delay of the VAR, we estimated two models: the first to
one delay and the second to two delays. For each model, we calculated the criteria
of Akaike (AIC), Schwarz (SC) as well as log likelihood (LV). The following table
shows the results obtained.
Table 2 Dickey Fuller’s test on the budget balance series in Algeria

ADF test statistic −3.984562 1% Critical valuea −2.6826
Augmented Dickey-Fuller test equation
Dependent Variable: D(SB)
Method: Least Squares
Included observations: 113 after adjusting endpoints
SB(−1) −0.261416 0.065035 −4.019593 0.0001
D(SB(−1)) 0.024199 0.096733 0.250162 0.8029
D(SB(−2)) 0.187342 0.094162 1.989568 0.0491
Source: Authors
a MacKinnon critical values for rejection of hypothesis of a unit root
Number of delays LV AIC SC

P=1 −456.2156 8.2820 8.7594
P=2 −428.9826a 8.0172a 8.6893a
a Index the order p to retain according to the criterion used
The three criteria used lead us to retain a VAR process (2); the log likelihood y
is greater, and the AIC and SC statistics are smaller than the autoregressive vector
process of order 1.
4 Results and Discussion
Empirical results for data are shown in Table 3. The first column reports the model’s
OLS estimate on all data: from first quarter of 1986 in the fourth quarter of 2014, a
total of 144 observations. These observations are classified in a single regime. From
the values read from the table (t-student = 0.17 for SB-1; t-student = 0.13. for SB-
2), the student test allows us to say that we cannot reject the assumption that the
coefficients of the primary balance delayed by one and two quarters are zero. The
economic gap then follows an autoregressive process of order 2 AR (2).
The second column of the table presents the results of the MS-VAR model
with two conjunctural regimes. Regime 1 is identified as the recession regime, and
Regime 2 is identified as expansion (The constant relative to the regime 1 is lower
than the constant relative to the regime 2; moreover, it is significantly different from
0). In recession, activity is on average lower ((−1.33 (−1.18)) or 2.5 percentage
points of GDP) at its level of expansion. Fifty-two points (45% of observations)
are classified in expansion, and 62 points (55% of observations) are classified in
recession.
90
Table 3 Results
Model Equation Linear sample Complete Cyclical regimes Cross regimes
Variable 1(R) 2(E) 1(Rbb) 2(Ebd) 3(Ebb) 4(Ebd)
Const 0.006660 −1.183865a 1.339212 −1.475928a 1.255163a 1.383350a 1.064932
Standard error (0.19309) 0.4363 1.4221 0.1327 0.5890 0.5794 1.0603
t-statistic (0.03449) (−2.7137) 0.9417 −11.1212 2.1311 2.3875 1.0044
EC_1 −0.496123a −0.693589a −0.242870 −0.961307a −0.038648 −0.045355 −0.150496
Standard error (0.08393) 0.1233 0.2569 0.0981 0.1093 0.1631 0.1962
t-statistic (−5.91137) −5.6263 −0.9453 −9.7990 −0.3535 −0.2781 −0.7671
EC_2 −0.498338a −0.482446a −0.392531a −1.002547a −0.035282 −0.061812 −0.148356
Standard error (0.08407) 0.1311 0.1283 0.0165 0.0607 0.1503 0.1298
t-statistic (−5.92776) −3.6787 −3.0584 −60.6295 −0.5809 −0.4113 −1.1432
SB_1 0.009895 −0.249367a −0.203767 0.025484 −0.001066 −0.019714 0.005375
Standard error (0.05635) 0.1242 0.2902 0.0172 0.1187 0.1450 0.2246
t-statistic (0.17559) −2.0078 −0.7022 1.6784b −0.0090 −0.1360 0.0239
SB_2 0.007598 0.046020 0.010049 −0.008738 0.009956 0.004068 −0.001305
Standard error (0.05643) 0.0902 0.0865 0.0181 0.0358 0.0994 0.0647
t-statistic (0.13464) 0.5104 0.1162 −0.4829 0.2781 0.0409 −0.0202
Unconditional Probability 0.54474 0.455263158 0.2785 0.3364 0.0482 0.3370
Number of observations 114 62.1 51.9 34.4 38.8 8.7 32.1
T. Mohammed
Duration of Regime 12.38 12.06 1.02 2.26 1.42 2.92
Probability of Transition R1 R2 R1 R2 R3 R4
Regime 1 0.9192 0.0829 Reg 1 0.01907 0.4409 0.4618 0.3045
Regime 2 0.0808 0.9171 Reg 2 0.5325 0.557 0.01098 0.0005371
Reg 3 0.07457 0.00167 0.294 0.03773
Reg 4 0.3739 0.0004034 0.2333 0.6572
Log vraisemblance −544.1527 −428.9826 −261.2273
AIC 9.7746 8.0172 5.7057
Source: OX Software
a The coefficient is significantly different from zero at the 5% threshold
b The coefficient is significantly different from zero at the 10% threshold
The Effect of Budgetary Policies on the Economy Activity in Algeria: A. . .
91
92 T. Mohammed
The transition probability matrix shows that the probability of going out of one
regime to another is very low (about 8% in both cases), and the probability of
persisting in one state is 92%. The durations in each regime are approximately the
same (12 quarters).
The analysis of the estimated coefficients by regime reveals that in a period of
recession (1), the balance coefficient is now significant to one delay; it is negative
and apprehensive, therefore a positive effect; a deterioration of the balance is
favorable to the activity; this situation describes a Keynesian nature (Budget deficit
helps boost economic activity). The consideration of the economic phase allows to
highlight a budgetary effect (Keynesian effect). The third column of the table shows
the results of the cross plans (four latent regimes). The identification of the different
regimes as the following:
– We have E (Yt/s = 2, 3) > E (Yt/s = 1.4), so expansion and budget balance (Ebb)
and expansion and budget deficit (Ebd) belong to {2,3}
– Recession and balanced budget (Rbb) and Recession and budget deficit (Rbd)
belong to {1,4}
– Moreover, the expectation of the budget balance is greater in the balanced budget
than in the budget deficit E (Gt/s = 3, 4) > E (Gt/s = 1, 2)
– Expansion of Balanced Budget (Ebb) and Recession of Balanced Budget (Rbb)
belong to {3,4}
– The expansion and budget deficit (Ebd) and the recession and budget deficit
(Rbd) belong to {1,2}.
– It is easy to deduce that:
1. Represents recession and budget deficit (1 = Rbd)
2. Represents expansion and budget deficit (2 = Ebd)
3. Represents expansion and balanced budget (3 = Ebb)
4. Represents recession and balanced budget (4 = Rbb)
The reduction of the AIC of this model compared to that with two Markov regime
changes shows that this specification is not over-parsed.
In a recession situation and a balanced budget, the coefficient on the budget
balance is significantly different from 0 at the 10% threshold, it is now positive;
the improvement of budget balance improves economic activity. This is the classic
nature (according to the Classics, the financing of activity by the budget deficit has
a negative effect on economic activity) according to the terminology of the study.
The number of observations in expansion regime and balanced regime (8
observations) is relatively low unlike other regimes (more than 32 observations).
5 Conclusion
The purpose of this study was to show that the effect of fiscal policies on the activity
of the Algerian economy depends on the cyclical situation and/or the budgetary
regime. The methodology used is that of the Markov regime change models (MS-
VAR).
The results show that in a recession, the balance coefficient is significant at a

delay; in contrary to the same coefficient when applying a linear regression on
the model; it is negative and ready for the following conclusion: an improvement
in the balance is unfavorable to the activity; this situation therefore describes a
Keynesian nature. The consideration of the conjunctural phase makes it possible
to highlight a Keynesian effect. In a recession and a balanced budget, the coefficient
on the budget balance with one delay is significantly different from 0 and becomes
positive: the improvement in the budget balance improves economic activity. This
is classic nature according to the terminology of the study. This work illustrates the
contribution of the Markovian regime change model and accounts for the various
forms of regime-dependent effects. The MS-VAR methodology highlighted specific
effects that did not emerge when applying linear regression to our model.
The MS-VAR methodology also has limitations, especially when short-lived
macroeconomic samples are applied.
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www.jstor.org/stable/1912017
Structure of Bond Pension Funds During
Decreasing Yield Curves
Mário Papík
Abstract Pension system in Slovakia has been transformed from a single-pillar

system to a three-pillar system since 2004. Following outbreak of financial crisis
between years 2008 and 2009, pension sector has been subjected to several
regulatory changes in order to protect retirement savings. Bond pension funds are
currently the most dominant element in pension system with 70% of total assets
allocated in this kind of pension funds. Aim of this manuscript is to analyse the
structure of assets owned by bond pension funds and to identify key portfolio
components that impact returns of these funds. This relationship has been analysed
on sample of all five bond pension funds operating in Slovakia for period from 2009
to 2017. Relationship between individual components of portfolio and portfolio
returns has been described by two linear regression models with mixed effects.
Statistically significant variables have been identified as bonds evaluated at fair
value with maturity less than 3 months and bonds evaluated at fair value with
maturity longer than 5 years, both denominated in Euros. This manuscript has
showed that bond pension portfolios, that are evaluated mainly at fair value and with
long maturity, are prone to increased interest rate risks in than in the past. Higher
interest rate risk could have negative impact on pension’s savings in the future.
Keywords Pension funds · Asset allocation · Yield curve · Bonds
1 Introduction
Pension system reforms have taken place at the breakthrough of millennium in

many Central and Eastern European countries. Demographic changes such as
reduced fertility of population and longer life span have resulted in necessity
of pension system reforms comparable to reforms already conducted in Western
M. Papík ()
Comenius University, Bratislava, Slovakia

https://doi.org/10.1007/978-3-030-63970-9_7
96 M. Papík
countries (Mitková, 2016). Negative trends in demography and complicated labour

migration from foreign countries make Slovakia no different than other Central
and Eastern European countries (Saxunová & Chorvatovičová, 2018). Pay-as-you-
go (PAYG) pension system has been applied in post-communist countries whilst
Western countries have reformed their pension systems to multi-pillar private
pension systems.
In 2018, assets managed by pension funds in Western countries represented
198.6% of GDP in Denmark, 173.3% in the Netherlands and 161% in Iceland. In
contrast, amount of assets managed by pension funds relative to GDP is around 11%
in Slovakia. Among all post-communist countries, Estonia reports highest amount
of assets managed by pension funds relative to GDP (17%) whilst average OECD
amount is approximately 50% (OECD, 2019).
Majority of pension system resources in Slovakia (over 70%) are allocated in
bond pension funds that guarantee nominal value of portfolio. Participation of
contributors in this type of pension fund is result of Amendment no. 137/2009.
During financial crisis in 2008 and 2009, all contributors have been transferred from
growth funds (currently named equity funds) to conservative (currently named bond
funds) funds. Contributors could have still chosen type of fund on individual basis,
even though, but most of them remained in conservative pension funds as assigned
by the government regulations.
Slovak pension funds are legally limited in their ownership and can only own
money market instruments and debt securities. As interest rates in the European
Union are close to zero, Exchange Traded Fund (ETF) or various bond funds might
be an alternative to these financial market instruments. Guaranteed pension funds
achieve lower returns in long run in comparison with returns of equity pension
funds.
Returns of bond pension funds consist mainly of revenues from fixed payments
(coupons and interest), revaluation differences of securities and differences arising
from foreign exchange revaluation. As there is currently no academic research
focusing on significant portfolio components of these institutions, aim of this
manuscript is to analyse structure of assets owned by bond pension funds and
to identify key portfolio components impacting financial returns of these pension
institutions.
This manuscript is divided into six chapters. First chapter includes introduction
and second chapter includes literature review. Chapter three formulates aim of this
manuscript. Methodology is included in fourth chapter and fifth chapter includes
results of analysis. The last chapter describes conclusions of this study.
2 Literature Review
Study of Chovancová, Hudcovský, and Kotasková (2019) has proved that returns of
pension funds are significantly correlated with bond indices. This proves assumption
that fixed income securities are the main component of pension funds. This
Structure of Bond Pension Funds During Decreasing Yield Curves 97
dependence is even stronger than that on stock indices. This relationship may also
depend on the fact that bond funds, mixed funds and part of equity funds in Slovakia
contain very high proportion of bond components in portfolios.
Naczyk and Domonkos (2016) have compared impact of legislation changes on
allocation of assets in pension funds. Their research has showed slight increase in
government and domestic bonds during post-crisis years in Slovakia. This research
has also showed decline of stock and foreign securities in portfolios of these funds.
Changes of portfolio structure may be result of amendments to the pension savings
system implemented during this period. Government interventions also negatively
affect performance of pension funds in Croatia (Draženović, Hodžić, & Maradin,
2019). Similarly, Witkowska, Kompa, and Mentel (2019) has showed that every
change in legislation equals to increase in portfolio volatility during the post-
government intervention period.
Papík (2017) has showed that eight portfolio components have high representa-
tion in Slovak equity and mixed funds. These components are: bonds at market value
up to 1 year, up to 5 years and more than 5 years, followed by shares and stocks,
both denominated in Euros, US dollars and Czech crowns and deposits in banks
in Euros. Statistically significant variables impacting returns of pension funds are
bonds at market value over 5 years in Euros, stocks at market value in Euros, stocks
at market value in US dollars, stocks at market value in Czech crowns, shares at
market value in Euros and shares at market value in US dollars. This research has
also shown that returns of equity and mixed funds also largely depend on equity
securities.
Research conducted by Louton, McCarthy, Rush, Saraouglu, and Sosa (2015)
on composition of US pension funds has confirmed positive relationship between
US equities and real estate, US equities and other assets, non-US equities and
real estate, and non-US equities and other assets. Amir and Benatzi (1998) have
proved existence of relationship between equities and expected rate of return of
pension funds in the US. The lower the volume of equity securities, the lower the
expected rate of return. This study has also showed that returns of pension funds do
not depend on volume of assets these funds own. In contrast to Amir and Benatzi
research, Li and Klumpes (2013) have showed that size of pension funds, in terms
of value of managed assets, impacts expected rate of return the UK.
Studies focused on impact of accounting standards on structure of pension
fund portfolios are separate group of studies. Amir, Guan, and Oswald (2010)
has showed once accounting standards IFRS 17 (Insurance contracts) and IAS 19
(Employee Benefits) have been applied, there is decline in ownership of equity
securities in UK pension funds. Equity securities have been replaced by debt
securities. This shift could be result of increases in funding levels, effective tax
rates, financial leverage and investment horizons that have taken place during
same period as transition to these accounting standards. Similar results have also
been achieved by Anantharaman and Chuk (2017). Their study has proved that
after implementation of IAS 19R, risk-taking in pension investments in Canadian
companies has decreased.
98 M. Papík
Burke, Chen, and Eaton (2016) has proved that asset evaluation through mark-
to-market (MTM) method brings financial transparency. On the other hand, MTM
evaluation has negative impact on reduction of earnings persistence and compara-
bility outweighs. This leads to increase in net costs for future financial reporting.
Slovak Accounting Standards (SAR) require bond securities to be evaluated at
market value or amortized cost. If bonds be evaluated at market value (MV), their
price depends on movement of yield curve. If bonds are evaluated at amortized cost
(AC), they are evaluated at effective interest rate.
3 The Aim of the Manuscript
Aim of this manuscript is to analyse structure of assets owned by bond pension

funds and to identify key portfolio components impacting financial returns of these
institutions. This relationship has been analysed on a sample of all five bond pension
funds currently operating in Slovakia. Data for individual pension funds have been
collected for period from 2009 to 2017. Individual components of pension fund
portfolios, relationship among these components and financial revenues have been
described through linear regression model with mixed effects.
4 Research Methodology
Data have been collected for all Slovak bond pension funds between 2009 and
2017 to fulfil the aim of this manuscript. Dataset includes selected financial
information from balance sheet, income statement and notes to financial statements
that have been prepared in accordance with Slovak Accounting Standards. Bond
pension funds included in dataset have been managed by pension management fund
companies Allianz, AXA, Poštová banka, NN and VÚB Generali. Company Aegon
has been excluded from this research as its merger with NN meant all historical data
is no longer publicly available.
Two linear models with mixed effects have been developed to analyse relation-
ship between asset accounts (mixed effects) and revenues from financial investments
of pension funds. Developed models have also analysed random slopes. In the first
model random slope is represented by time factor, and in the second model, random
slope is represented by time and particular pension fund management company
(Field, Miles, & Field, 2012).
First developed model (1) with random slope time has following form:
Yi = β1 X1,t + · · · + βk Xk,t + δ1 T1 + · · · + δt Tt + εt (1)
where Yit is a dependent variable representing revenues from financial investments,

i.e. sum of interest revenue, interest expense, net profit or loss from financial
operations, exchange rate differences arising from financial assets. Index t denotes
specific point in time from 2009 to 2017. Variable Xk, t is an independent variable
which represents percentage of financial assets to total assets of pension fund.
Variable β k represents coefficients of regression line for respective independent
variable, and k denotes number of independent variables tested. For bond pension
funds k equals 13 variables. Variable Tt is a dummy variable of binary character
expressing individual years during the analysed period from 2009 to 2017. δ t is a
random effect factor for binary time variable. The last variable εt reflects value of
corresponding residual component of linear regression model with mixed effects for
particular time t.
Second developed model (2) with random slopes time and pension fund manage-
ment company has the following form:
Yit = β1 X1,it + · · · + βk Xk,it + δ1 T1 + · · · + δt Tt + γ1 E1 + · · · + γn En + εit

(2)
Variables are same as variables in model (1). Index i denotes specific entity—
pension fund management company. Variable En is a dummy binary independent
variable specific to each entity. γ n represents random effect factor for binary dummy
variable. Variable n then represents total number of institutions considered in each of
financial sectors. For pension fund sector, it has been five pension fund management
companies.
Coefficients of models (1) and (2) have been estimated by statistical software
R studio. Linear regression model with mixed effects package has been used for
estimation. Final model has been tested for absence of multi-collinearity. Accuracy
of model has been verified by chi-square of goodness-of-fit test, the log-likelihood
ratio function, Akaike Information Criteria, and Bayesian Information Criteria.
Estimated values have been tested by Shapiro-Wilk test of normal data distribution
(Field et al., 2012).
5 Results of Analysis
Returns of actively managed bond pension funds have been guaranteed. Therefore,
pension funds have mainly owned safe assets during the analysed period. These
pension funds have been regulated by Amendment no. 137/2009 and by Amendment
no. 252/2012. Government regulations restrict ownership of bond pension funds to
bonds, financial investments, and transactions designed to restrict foreign exchange
and interest rate risks. Therefore over 75% of assets allocated in pension funds are
debt securities and 20% are bank deposits (National Bank of Slovakia, 2010). Newly
introduced feature of bond pension funds are ETF securities that copy yield of bond
indices in order to increase profitability. Their representation among all assets has
reached 6% in 2017 and has been used in half of bond pension funds (National Bank
of Slovakia, 2018).
100 M. Papík
Fig. 1 Euribor with 1 year, 3 years, and 5 years maturity. Source: Own calculation based on
Eurostat data
Interest rates in Eurozone have decreased firstly after outbreak of financial crisis
between years 2008 and 2009, and then following outbreak of the debt crisis in
Europe in 2011. Intention of European Central Bank (ECB) to decrease interest
rates has been stimulation of economic growth. Ever since, interest rates have been
decreasing until nowadays. Nowadays, 3-year interest rates reach negative values
and 5-year interest rates are slightly above 0. Evolution of the 1, 3, and 5-year
Euribor rates is shown in Fig. 1.
Extension of bond maturities is caused by decreasing interest rates as price of
debt securities increases with decreasing interest rates. This situation is depicted
in Table 1. Table 1 lists asset components of bond pension funds in each year. As
already mentioned, residual maturity of bonds has increased by more than 2 years.
This increase in residual maturity has also caused increase in modified duration
indicator, which increased to 3.4 for bond portfolios.
Number of bonds held to maturity (evaluated by amortized costs) has increased
to almost 15% since 2012. Benefit of holding bonds to maturity in a portfolio is
no change in value of these bonds in case market interest rates change. Therefore,
in the event of an unexpected upward shift of yield curve, value of bond portion of
portfolio would not decrease. Growth of this component in asset structure of pension
funds suggests that funds are trying to protect themselves from eventual interest rate
risks.
Volume of government debt securities owned by pension funds has decreased by
10%, to current 50% of total assets. This decline can be explained by increased
interest of pension fund management in bonds of financial and non-financial
institutions. Volume of bonds issued by non-financial institutions is comparable to
that of financial institutions reaching up to 25% of total assets owned by pension
funds. The most commonly held foreign currency throughout analysed period has
been US dollar, Polish zloty, and Czech crown.
Table 1 Bond pension funds financial assets

Year 2009 2010 2011 2012 2013 2014 2015 2016 2017
Market 71.78% 73.06% 74.11% 62.45% 70.60% 73.96% 73.35% 79.51% 72.75%
value
Bond 71.78% 69.98% 76.49% 61.86% 65.13% 68.87% 67.37% 71.56% 64.28%
securities
EUR 71.78% 69.98% 76.49% 61.86% 64.93% 68.10% 66.46% 70.00% 63.37%
Up to 0.51% 3.27% 3.36% 2.01% 0.01% 0.01% 0.02% 0.00% 0.00%
1 month
Up to 19.64% 1.71% 1.48% 0.04% 0.03% 0.04% 0.04% 0.00% 0.00%
3 months
Up to 0.00% 0.03% 2.66% 0.47% 0.02% 0.03% 0.03% 0.00% 0.00%
6 months
Up to 33.23% 30.12% 16.43% 10.68% 0.45% 0.02% 0.02% 0.00% 0.00%
1 year
Up to 0.00% 8.98% 9.50% 9.46% 1.34% 1.54% 1.44% 0.70% 0.30%
2 years
Up to 15.95% 19.28% 25.50% 25.09% 24.63% 27.15% 21.03% 15.94% 11.32%
5 years
Over the 2.45% 6.59% 17.55% 14.09% 38.43% 39.31% 43.88% 53.36% 51.75%
5 years
USD 0.00% 0.00% 0.00% 0.00% 0.20% 0.45% 0.58% 0.96% 0.29%
Up to 0.00% 0.00% 0.00% 0.00% 0.02% 0.20% 0.18% 0.57% 0.18%
5 years
Over the 0.00% 0.00% 0.00% 0.00% 0.18% 0.26% 0.39% 0.39% 0.11%
5 years
CZK 0.00% 0.00% 0.00% 0.00% 0.00% 0.03% 0.03% 0.07% 0.07%
Up to 0.00% 0.00% 0.00% 0.00% 0.00% 0.03% 0.03% 0.03% 0.03%
5 years
Over the 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.04% 0.04%
5 years
PLN 0.00% 0.00% 0.00% 0.00% 0.00% 0.29% 0.31% 0.53% 0.55%
Up to 0.00% 0.00% 0.00% 0.00% 0.00% 0.22% 0.08% 0.00% 0.00%
5 years
Over the 0.00% 0.00% 0.00% 0.00% 0.00% 0.06% 0.22% 0.53% 0.55%
5 years
Shares 0.00% 0.00% 0.00% 0.43% 0.53% 0.13% 0.37% 1.55% 2.34%
EUR 0.00% 0.00% 0.00% 0.43% 0.53% 0.13% 0.37% 1.41% 2.00%
USD 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.14% 0.34%
Stocks 0.00% 0.00% 0.00% 0.16% 4.94% 4.96% 5.60% 6.39% 6.00%
EUR 0.00% 0.00% 0.00% 0.16% 4.94% 4.96% 5.60% 6.39% 6.00%
Amortized 0.00% 0.00% 0.00% 7.15% 5.09% 7.70% 9.76% 10.32% 14.54%
cost
Bond 0.00% 0.00% 0.00% 7.15% 5.09% 7.70% 9.76% 10.32% 14.54%
securities
Up to 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.01% 0.00% 0.00%
1 month
(continued)
102 M. Papík
Table 1 (continued)
Up to 0.00% 0.00% 0.00% 0.53% 0.00% 0.00% 0.27% 0.00% 0.00%
5 years
Over the 0.00% 0.00% 0.00% 6.62% 5.09% 7.69% 9.47% 10.32% 14.54%
5 years
Loans and 20.88% 24.83% 22.89% 27.30% 20.82% 17.11% 14.20% 9.14% 11.49%
receivables
Short-term 20.48% 22.97% 21.43% 26.66% 19.93% 11.05% 4.82% 5.32% 8.18%
receivables
EUR 20.38% 21.30% 21.43% 26.66% 19.93% 10.18% 4.81% 5.32% 7.26%
USD 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.00% 0.00%
Long-term 0.40% 1.86% 1.46% 0.64% 0.89% 6.06% 9.38% 3.82% 3.31%
receivables
EUR 0.40% 1.86% 1.46% 0.64% 0.89% 6.06% 9.38% 3.82% 3.31%
Cash and 7.33% 2.11% 2.41% 3.01% 3.49% 1.24% 2.14% 0.49% 0.77%
cash
equivalents
EUR 7.33% 2.11% 2.41% 3.01% 3.46% 1.16% 2.13% 0.46% 0.76%
PLN 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01%
USD 0.00% 0.00% 0.00% 0.00% 0.02% 0.08% 0.01% 0.03% 0.00%
Source: Own calculation based on annual financial statements
Table 2 Bond pension funds’ returns and profits

2009 2010 2011 2012 2013 2014 2015 2016 2017
Returns 1.10% 0.88% 1.12% 1.75% 0.60% 3.44% 0.75% 2.24% 1.52%
Profit before 1.10% 0.87% 1.12% 1.49% 0.32% 2.84% 0.55% 1.70% 1.10%
income
taxes
Source: Own calculation based on annual financial statements
Interest revenue, received coupons, differences arising from purchase or sale of

securities and exchange rate differences are main revenue sources for bond pension
funds. As Table 2 clearly shows, development of returns of pension funds has
been oscillating with increasing trend depending on situation on financial markets.
Government deregulations for pension funds have been main source of revenue
growth. Consequently, pension funds have been able to claim various payments
related to management of these funds. Despite unfavourable trends during financial
crisis, nominal value of bond pension funds has gradually increased since crisis
period.
Figure 2 provides closer look at profits of pension funds generated during
financial year. Stagnation of profits is clear during crisis throughout 2009–2012.
Profit decline in 2013 is caused by increased costs associated with merger of growth,
balanced and conservative funds into one guaranteed bond fund. Pension fund of
management company VÚB Generali has been the only fund that has generated
accounting loss in this period. Profit levels oscillated with slightly increasing trend
Fig. 2 Coplot graph for returns. Source: Own calculation in R Studio
for all the analysed funds. Except for pension fund managed by VÚB Generali
pension fund management company, all coplot charts in Fig. 2 show that profit
trends for all the analysed bond funds have been following similar trends.
Results for linear model with mixed effects (1) included in Table 3 show that
only bonds valued at market value with maturity up to 3 months (t (43.79) = 1.788;
p < .1) and bonds valued at market value with maturity more than 5 years (t
(36.47) = 5.155; p < .05), both denominated in Euros, have statistically significant
effect on profits of Slovakia pension funds. Coefficients of both variables are posi-
tive, indicating their positive impact on analysed variable. Results are also confirmed
by calculated confidence intervals for statistically significant variables. Statistically
significant variables have achieved values higher than zero on confidence intervals
95%. Higher percentage of these assets in pension funds’ portfolios is reflected in
the highest profit among other variables. Coefficients of tested variables and results
of further analysis are shown in Table 3.
Random effects from Table 3 show that, during first half of analysed period,
pension funds have generated higher profits than population average during whole
analysed period. At the end of analysed period (2015–2017), results have been
lower than the population average. This has been reflected in developed model
with negative coefficient for particular random effect. Graphical interpretation with
comparison of fitted vs. residuals indicates homoscedasticity of developed model
as seen in Fig. 3. Values of developed model are normally distributed as seen
on the left part of Fig. 3a. All estimated values in Fig. 3a have approximately
same standard deviation. The Shapiro-Wilk test of normality has not rejected null
hypothesis (W = 0.97241; p = 0.35) that residual values are of normal distribution.
These results are also confirmed visually in right part of the Fig. 3b normal Q-Q
figure. This figure shows that even existence of outliers does not affect normality of
developed model. Coefficient of determination is 0.65, and therefore this model is
able to describe up to 65% of analysed data for guaranteed bond pension funds.
104 M. Papík
Table 3 Results of linear model with mixed effects (1)

Fixed effects Estimate Std, error df t value Pr(>|t|) P value
Bonds at MV up to 1 month 0.018 0.026 36.512 0.662 0.512
in Euros
Bonds at MV up to 3 months 0.033 0.018 43.789 1.788 0.081 .
in Euros
Bonds at MV up to 6 months 0.011 0.076 41.785 0.147 0.884
in Euros
Bonds at MV up to 1 year in −0.003 0.015 43.418 −0.206 0.838
Euros
Bonds at MV up to 2 years in 0.005 0.020 37.402 0.262 0.795
Euros
Bonds at MV up to 5 years in −0.007 0.011 44.392 −0.618 0.540
Euros
Bonds at MV more than 0.035 0.007 36.468 5.155 0.000 ***
5 years in Euros
Stocks at MV in Euros 0.015 0.025 44.435 0.609 0.546
Shares at MV in Euros −0.055 0.040 33.773 −1.367 0.181
Bonds at AC up to 1 month in −0.008 0.017 41.569 −0.484 0.631
Euros
Bonds at AC more than 0.006 0.007 44.617 0.876 0.386
5 years in Euros
Receivables 0.035 0.039 44.990 0.898 0.374
Cash 0.018 0.026 36.512 0.662 0.512
Random effect (time)
2009 0.0023
2010 0.0049
2011 0.0045
2012 0.0074
2013 −0.0104
2014 0.0136
2015 −0.0084
2016 −0.0005
2017 −0.0032
R-squared 0.65
Residual deviance −304.80
Degrees of freedom residuals 31
Akaike Inf. Criterion −276.80
Bayesian Inf. Criterion −251.51
Log-likelihood ratio test 152.4
Shapiro-Wilk norm. test (p 0.353
value)
Significance codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1
Source: Own calculation in R Studio based on annual financial statements
Fig. 3 (a) Fits vs. residuals plot and (b) normal Q–Q plot for commercial banks’ model. Source:
Own calculation in R Studio
Analysis has further extended developed linear model (1) with mixed effects
by random effect into another model (2). Another random effects are pension
fund management companies. Results of variance analysis by ANOVA function in
R studio statistic have showed that there is no statistically significant difference
(SD = −306.1; χ 2 (1) = 1.299; p = 0.2544) between linear model with mixed
effect with time as only random effect (1) and linear model with mixed effects with
time and pension fund management companies as random effects (2). Hypothesis
that pension fund management company affects profits of this company has been
rejected. Profits of pension funds are hence affected by both volume of 3-month-
denominated market value bonds denominated in Euros and bonds valued at more
than 5 years’ market value also denominated in Euros. Profits of pension funds are
also affected by time factor that affects all pension funds and can be interpreted as
situation on financial markets.
6 Conclusions
This manuscript has shown that key components of portfolio with significant
effect on returns of bond pension funds are bonds valued at market value with
maturity of 3 months denominated in Euros and bonds valued at market value with
maturity of more than 5 years also denominated in Euros. Developed model has
showed that revenues of pension funds depend on time factor. Time factor, in this
manuscript, represents macroeconomic trends. Ability to manage portfolio of bond
pension funds therefore does not affect their returns. This leads to a suggestion that
contributors might rather consider macroeconomic trends and focus on structure of
individual pension funds than selecting a fund by its managing institution.
106 M. Papík
Finding that pension funds in Slovakia have been influenced by external trends
is in accordance with other studies showing correlation between returns of pension
funds and bond indices. Dominant portfolio components of bond pension funds,
like of equity and mixed pension funds, are bonds with longer times to maturity
evaluated at market value. Non-guaranteed pension funds in Slovakia therefore,
whilst having different investment strategy, contain significant portion of portfolio
comparable to portfolio of guaranteed pension funds.
Possible limitation of this manuscript is relatively small data sample. Even
though data sample represents entire market of bond pension funds in Slovakia,
it still consists of only five bond funds. Another limitation of this research could
be Slovak Accounting Standards. Slovak Accounting Standards are very similar
to IFRS, but still have minor differences and local specifics that could lead to
differences when compared with global pension funds.
Future studies should address factor of accounting standards that does have
significant impact on portfolio management, specifically in the process of bond
evaluation. With increasing interest rates, evaluation of bonds at market value rather
than evaluation at amortized cost might have impact on returns of portfolios. Both
portfolio managers and contributors should consider this finding in their future
investment decisions.
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Extracting Common Factors
from Liquidity Measures with Principal
Component Analysis on the Polish Stock
Market
Joanna Olbrys and Elzbieta Majewska
Abstract According to the literature, the principal component analysis (PCA) can
be utilized to extract common features of a set of economic variables. Therefore,
the aim of this research is to assess a possibility of using the PCA to extract
common components of liquidity across a sample of equities, and from a set of
liquidity measures on the Polish stock market. The database contains the group
of 86 WSE-listed companies. Seven liquidity proxies, namely percentage relative
spread, percentage realized spread, percentage price impact, percentage order ratio,
modified version of the Roll estimator, modified turnover and modified Amihud
measure, are utilized in the study. The PCA results reveal that common latent factors
in liquidity estimates exist on the Polish stock market. Moreover, the robustness
analyses confirm the evidence of common sources in liquidity variation within the
whole sample period and three subsamples: the pre-crisis, crisis and post-crisis
periods. To the best of the authors’ knowledge, all empirical findings reported here
are novel and have not been presented in the previous literature.
Keywords PCA · Liquidity measure · High-frequency data · Daily data ·

Warsaw stock exchange
JEL codes: C10, C58, G01, G10, G12
J. Olbrys ()
Bialystok University of Technology, Bialystok, Poland
e-mail: j.olbrys@pb.edu.pl
E. Majewska
University of Bialystok, Bialystok, Poland
e-mail: e.majewska@uwb.edu.pl
https://doi.org/10.1007/978-3-030-63970-9_8
110 J. Olbrys and E. Majewska
1 Introduction
Financial markets liquidity is especially difficult to explore as it is unobservable.

Moreover, some researchers emphasize that liquidity measures capture only noisy
information about liquidity (e.g. Chen, 2005). Since Chordia, Roll, and Subrah-
manyam (2000), the market microstructure literature, has shifted its focus from
the assessment of liquidity of individual equities towards analyses of common
determinants and components of liquidity across securities. According to the
literature, the principal component analysis (PCA) has widespread applications
as it unveils simple underlying structures in complex data sets using analytical
solutions from linear algebra. It can be utilized to extract common features of a
set of economic variables. Therefore, one of possible applications of the PCA could
be an extraction of latent factors from a set of liquidity measures across securities
on equity markets.
The vast majority of research on common components of liquidity with the
PCA concerns developed markets. Hasbrouck and Seppi (2001) analyse the U.S.
stock market, and they use the PCA to show that common factors exist in order
flows and returns of the 30 equities in the Dow Jones Industrial Average (DJIA).
Chen (2005) stresses that although there are various liquidity proxies which are
substantially different in theory, they share common sources of liquidity variation
on the New York Stock Exchange (NYSE). The author examines seven liquidity
proxies and employs the PCA to extract the first principal component, which
captures 62% of standardized liquidity variance. Korajczyk and Sadka (2008) utilize
the asymptotic PCA to extract the common, systematic components of liquidity
across a large sample of stocks and from a set of liquidity measures on the NYSE.
They assess commonality in liquidity with principal components of liquidity proxies
as latent factors. Foran, Hutchinson, and O’Sullivan (2015) investigate liquidity
commonality and pricing in the United Kingdom (UK) stock market. They apply the
asymptotic PCA on the sample of equities to extract market or systematic liquidity
factors. Von Wyss (2004) conducts the research on liquidity in the Swiss Exchange.
Among other things, he provides and interprets the results of the PCA for each stock,
separately.
In general, the studies concerning commonality in liquidity on emerging markets
in the world are scarce, and, in particular, they do not utilize the PCA to identify
latent factors in liquidity. For example, B˛edowska-Sójka (2019) and Olbryś (2019)
deeply explore commonality in liquidity on the Warsaw Stock Exchange (WSE) by
using different econometric methods and various liquidity proxies, but they do not
employ the PCA.
Therefore, the main goal of this study is to assess a possibility of using the PCA
to extract common components of liquidity across a sample of equities, and from
a set of liquidity estimates on the Polish emerging stock market. To the best of the
authors’ knowledge, all empirical findings presented here are novel and have not
been reported in the literature thus far.
Extracting Common Factors from Liquidity Measures with Principal. . . 111
The remainder of this study is organized as follows. Section 2 presents the

methodological background of the PCA. In Sect. 3, liquidity/illiquidity proxies used
in this study are described in detail. Section 4 contains data description and discusses
the empirical results concerning common sources of liquidity variation on the WSE.
The last section recalls the main findings, concludes and indicates further directions
of the research.
Nomenclature
%RS Percentage relative spread

%RealS Percentage realized spread
%PI Percentage price impact
%OR Percentage order ratio
LR The Lee and Ready (1991) trade side classification algorithm
MAmih Modified Amihud measure
MRoll Modified version of the Roll estimator
MT Modified turnover
WSE The Warsaw Stock Exchange
2 Principal Component Analysis: Methodological

Background
The most common mathematical factor model is principal component analysis

(PCA) (Brooks, 2019). The PCA is a multivariate non-parametric technique that
analyses a data matrix in which observations are described by several inter-
correlated quantitative variables (Abdi & Williams, 2010). The main idea is to
reduce the dimensionality of a data set containing a large number of interrelated
variables, while retaining as much as possible of the variation present in the
data. Observable input variables are transformed into new unobservable (latent)
variables called principal components, which are linear combinations of original
variables. Consecutive principal components are uncorrelated with each other and
are calculated in a way that maximizes variance that has not been explained by
preceding principal components. Consequently, a few first components contain
the vast majority of information that is present in the data set. Briefly, the PCA
constructs common factors to maximize explanatory power within a set of related
variables (Hasbrouck & Seppi, 2001).
Suppose that X is a vector of N random variables, and a covariance (or
correlation) matrix Ω of elements of vector X is known. The first step of the PCA
is to look for a linear function α1T x of the elements of the vector X (called the first
principal component) having a maximum variance and given by (1):

N
z1 = α1T X = α11 x1 + α12 x2 + · · · + α1N xN = α1j xj , (1)
j =1
where α 1 = [α 11 , α 12, · · · , α 1N ]T is a vector of N factor loadings. The next step is

to look for a linear function z2 = α2T x (called the second principal component)
which is uncorrelated with z1 and has maximum variance, and the procedure is then
repeated. The k-th derived variable is the k-th principal component, and it is given
by (2):
zk = αkT X, k = 1, 2, . . . , N, (2)
where α k is an eigenvector of Ω corresponding to its k-th largest eigenvalue λk .

Furthermore, if α k is chosen to have unit length, then var(zk ) = λk (Jolliffe, 2002,
pp. 2–4).
It is important to note that the PCA is scale-dependent. The principal components
of a covariance matrix and those of a correlation matrix are different. In applied
research, the PCA of a covariance matrix is useful only if the variables are expressed
in commensurable units. When variables are measured along different scales or they
differ significantly in terms of variability, it is advisable to calculate the components
from the sample correlation matrix, which is analogous to standardizing all the
variables prior to calculation (e.g. Jackson, 1991; Jolliffe, 2002).
The goal of the PCA is to extract the majority of important information from a
data matrix. The question is, how many components need to be considered? One of
the standard procedures is the Kaiser (1958) criterion. For the correlation matrix
used as input for the PCA, the Kaiser criterion suggests that only the principal
components with an eigenvalue larger than unity, which means larger than the
average eigenvalue, should be used (e.g. Abdi & Williams, 2010; von Wyss, 2004).
3 Liquidity Proxies Utilized in the Study
This section presents seven liquidity proxies that are utilized in the research. Five
out of them (i.e. percentage relative spread, percentage realized spread, percentage
price impact, percentage order ratio, and modified version of the Roll estimator)
are approximated using high-frequency (intraday) data. Furthermore, two liquidity
measures are calculated from low-frequency (daily) data. These estimates are as
follows: the modified daily turnover and the modified version of daily Amihud
liquidity/illiquidity proxy.
3.1 Liquidity Proxies Derived from High-Frequency Data
High-frequency financial data are useful in analysing a variety of topics related to

trading processes. To estimate various liquidity/illiquidity proxies using intraday
data, it is important to recognize the side initiating the transaction and to distinguish
between buyer- and seller-initiated trades. The WSE is as an order-driven market
with an electronic order book, but information about the best bid and ask price is
not publicly available. As a consequence, researchers rely on indirect classification
rules to infer the initiator of a trade. Various classification procedures of this type are
presented in the literature, but the Lee and Ready (1991) algorithm (LR) remains the
most frequently used.1 Table 8 in the Appendix describes details concerning the LR
procedure. In this study, the LR algorithm is employed, as Olbryś and Mursztyn
(2015) confirmed that the LR performs quite well for data from the WSE. The
empirical results turn out to be robust to the choice of the sample and do not depend
on a firm’s size.2
In this research, five alternative liquidity/illiquidity proxies derived from intraday
data are employed. Three of them, namely percentage realized spread, percentage
proxy for price impact, and percentage order ratio, are supported by a trade side
classification procedure (Olbryś & Mursztyn, 2017). Moreover, two other estimates
based on high-frequency data are utilized in the study: percentage relative spread
and the modified version of the Roll (1984) estimator for the effective spread. Table
1 contains definition of these five liquidity estimates, and it needs some comments.
Percentage Relative Spread is a measure of illiquidity because a high value of
this indicator denotes low liquidity, while a low value indicates high liquidity. The
value of daily percentage relative spread is calculated as a volume-weighted average
of percentage relative spreads computed over all the trades within a day (Olbryś,
2019).
Percentage Realized Spread is a temporary component of the effective spread,
and it is sometimes referred to as a price reversal component since a dealer makes a
profit only if the price reverses (e.g. Huang & Stoll, 1996). Daily percentage realized
spread value is calculated as a volume-weighted average of percentage realized
spreads computed over all trades within a day, and it is defined as equal to zero
when all transactions within a day are unclassified (Olbryś & Mursztyn, 2017).
Percentage Price Impact is usually defined as the increase (decrease) in the quote
midpoint over a time interval beginning at the time of the buyer(seller-)-initiated
trade. This is a permanent component of effective spread, e.g. (Goyenko, Holden, &
Trzcinka, 2009). Daily proxy of percentage price impact is calculated as a volume-
weighted average of percentage price impact estimates computed over all trades
within a day. Moreover, it is defined as equal to zero when all transactions within a
day are unclassified (Olbryś & Mursztyn, 2017).
Percentage Order Ratio is utilized as an indicator of imbalance in daily orders.
The value of daily order ratio is defined to be equal to zero in the following two
1 For a brief literature review concerning various trade classification rules, see, e.g., Olbryś and
Mursztyn (2015).
2 For details about the C++ program for the LR procedure, see Olbryś and Mursztyn (2015, p. 48).
cases: (1) when all of the transactions within a day are unclassified, or (2) when the
total volume of daily trading, in the denominator, is equal to zero (Olbryś, 2019).
The modified version of the Roll estimator for the effective spread is estimated
using trade-to-trade price changes within a day, e.g. (Stoll, 2000). The original
version of the Roll estimator is well-defined only for negative first-order serial
covariance of price changes, which is not guaranteed in practice. Corwin and Schultz
(2012) stress that the serial covariance of price changes is frequently positive and, in
such cases, researchers could do one of the following things: (1) treat the observation
as missing, (2) set the Roll estimator to zero, or (3) multiply the serial covariance
by negative one, estimate the spread, and multiply the spread by negative one to
obtain a negative spread estimate. In this study, the second proposition is used (see
Table 1).
Table 1 Definition of liquidity proxies derived from high-frequency data

Liquidity
proxy Definition

200· PtH −PtL
1 Percentage %RSt =
Pt +Pt
H L
relative
spread

Pt
200 · ln Pt+5 , when trade t is classified as buyer − initiated
2 Percentage %RealSt = Pt+5
realized 200 · ln Pt , when trade t is classified as seller − initiated
spread ⎧
⎪
⎨ 200 · ln
mid
Pt+5
, when trade t is classified as buyer − initiated
Ptmid
3 Percentage %PIt =
⎪
⎩ 200 · ln
Ptmid
trade t is classified as seller − initiated
price impact mid , when
Pt+5

m
i=1 VBuyi − kj =1 VSellj
4 Percentage %OR = 100 · N
n=1 Vn
order ratio
The modified
√
version of the
200 · − cov (Rt , Rt−1 ), when cov (Rt , Rt−1 ) < 0
5 Roll estimator MRollt =
0, when cov (Rt , Rt−1 ) ≥ 0
Abbreviations: PtH PtL are the high and low prices of a stock at time t, respectively,
Pt is the transaction price of a stock at time t, approximated by the closing price,
Pt+5 is the closing price of the fifth trade after trade t for a stock,
P H +P L
t m =
P mid t t
is the midpoint price at time t for a stock,
2
i=1 VBuyi is the daily cumulative volume of trading related to transactions classified as buyer−
initiated
k for a stock,
j =1 VSellj is the daily cumulative volume of trading related to transactions classified as seller−

initiated for a stock, N n=1 Vn is the daily cumulative volume of trading for all transactions for a
stock, Rt is the logarithmic ultra − short rate of return of a stock at time t
For all measures, the multiplier 100 converts units to percent
Source: Authors’ elaboration based on Roll (1984), Olbryś (2019) and Olbryś and Mursztyn
(2019)
Table 2 Definition of liquidity proxies derived from low-frequency daily data

Liquidity proxy Definition

|rt |
log 1 + , when Vt
= 0
1 The modified version of the MAmiht = Vt
Amihud measure 0, when Vt = 0

Vt 1 30 Vt−k
2 The modified version of daily MTt = log 1 + NSOt − 30 · k=1 log 1 + NSOt−k
turnover
Abbreviations: rt is the simple rate of return of stock on day t, Vt is the trading volume of
stock on day t, NSOt is the number of shares outstanding of stock on day t.
Source: Authors’ elaboration based on Amihud (2002), Karolyi, Lee, and van Dijk (2012) and
Olbryś (2019).
3.2 Liquidity Proxies Derived from Low-Frequency Daily Data
Some measures are especially often advocated in the literature to provide empirical
study in liquidity/illiquidity effects in low-frequency data. In this study, two proxies
based on daily data are calculated: the modified version of the Amihud (2002)
illiquidity measure and the modified version of daily turnover. Details are presented
in Table 2, but they require a few comments.
In the literature, the Amihud measure is usually calculated monthly or for other
periods (e.g. Fong, Holden, & Trzcinka, 2017; Foran et al., 2015; Goyenko et al.,
2009), but in this paper, daily values of this proxy are estimated (Olbryś, 2019).
The modified version of daily turnover is computed in logs and de-trend with
a 30-day moving average to account for non-stationarity. The moving average is
calculated for the available data over the past 30 trading days. It is important to
note that using the modified version of this indicator disentangles day-of-the-week
effects from daily turnover.
4 Data Description and Empirical Results on the WSE
In the present study, two data samples are utilized. The first sample consists of
daily data from January 2, 2005, to December 30, 2016, for the group of 86 WSE-
traded companies. It contains 3005 trading days for each stock. The second sample
contains high-frequency data rounded to the nearest second for the same period and
the same group of equities. Both daily and intraday data sets include the opening,
high, low and closing prices, and volume for each security over one unit of time. All
details concerning the database are presented in the papers (Olbryś, 2019; Olbryś
& Mursztyn, 2018), but it is important to note that a large number of the WSE-
listed firms unveil a substantial non-trading problem which affects the database
content (Nowak & Olbryś, 2016). This study is the continuation of the research
on commonality in liquidity on the WSE presented in the paper (Olbryś, 2019), and
therefore the database is the same.
To verify the robustness of the empirical findings, the calculations are conducted
both for the whole sample and over three consecutive subsamples, each of equal
length (436 trading days), e.g. (Olbryś & Mursztyn, 2019, p. 185):
1. The pre-crisis period (from September 6, 2005, to May 31, 2007),
2. The Global Financial Crisis (GFC) period (from June 1, 2007, to February 27,
2009),
3. The post-crisis period (from March 2, 2009, to November 19, 2010).
The GFC period on the WSE is precisely defined based on the paper (Olbryś &
Majewska, 2015).
4.1 Descriptive Statistics and Some Properties of Liquidity

Proxies Time Series on the WSE
The properties of liquidity proxies used in this research have been thoroughly
investigated and reported in some recent papers. Olbryś and Mursztyn (2018, 2019)
have explored distributional properties, linear and non-linear dependences, as well
as stationarity of daily time series of seven liquidity proxies that are utilized in the
present study. The results have revealed some stylized facts and typical features of
the analysed time series. Moreover, Olbryś (2018) has tested stability of correlations
between four liquidity estimates derived from high-frequency data within the whole
sample period and three sub-periods: the pre-crisis, crisis and post-crisis periods,
which are presented above in this section. Although the results have been not
homogenous, they have indicated that liquidity measures seem to capture various
sources of market liquidity.
In fact, six liquidity proxies used in this study, namely (1) percentage relative
spread, (2) percentage realized spread, (3) percentage price impact, (4) percentage
order ratio, (5) modified version of the Roll estimator, and (6) modified Amihud
measure, approximate illiquidity. Therefore, before the PCA calculations, the series
are multiplied by negative one to obtain variables that are increasing alongside with
liquidity of individual stocks. Only the modified version of daily turnover measures
liquidity, while the remaining six estimates are transformed to be liquidity proxies.
In the next step, the aggregate liquidity proxies are calculated as the cross-sectional
averages of the corresponding individual-stock liquidity measures for the group
of 86 equities within the whole sample period. Table 3 contains basic descriptive
statistics for seven cross-sectional liquidity proxies.
Table 3 Basic descriptive statistics for cross-section of liquidity measures within the whole
sample period from January 2005 to December 2016 (3005 trading days for each variable)
Liquidity proxy Mean Average std. dev. Max Min
1 %RS −0.12926 0.03325 −0.05286 −0.31897
2 %RealS −0.23750 0.13818 0.39079 −1.04905
3 %PI 0.08743 0.08968 0.65915 −0.45153
4 %OR −38.54558 3.65778 −19.66027 −52.36167
5 MRoll −0.67543 0.17567 −0.26632 −1.89240
6 MT 0.00043 0.00042 0.00501 −0.00086
7 MAmih −0.00413 0.00631 −0.00004 −0.05014
Notes: Liquidity proxies are defined in Tables 1 and 2. ‘Mean’ is the cross-sectional average of
the time series averages. ‘Average Std. Dev.’ is the cross-sectional standard deviation of the time
series means of each measure
Source: Own calculations
Table 4 The PCA results from the seven liquidity proxies (the whole sample period)
Principal component analysis
Liquidity proxy PC1 PC2 PC3 PC4 PC5 PC6 PC7
1 %RS 0.235 −0.662 −0.045 0.186 0.240 0.631 0.122
2 %RealS 0.661 0.204 −0.005 −0.018 −0.056 0.130 −0.708
3 %PI −0.626 −0.342 −0.005 0.042 0.069 −0.029 −0.696
4 %OR −0.060 −0.105 −0.583 −0.572 −0.514 0.231 0.015
5 MRoll 0.315 −0.521 −0.321 0.078 0.023 −0.721 0.012
6 MT −0.067 0.304 −0.617 −0.048 0.719 0.044 −0.018
7 MAmih −0.086 0.172 −0.416 0.792 −0.391 0.097 0.0003
Eigenvalue 2.014 1.326 1.301 0.965 0.714 0.577 0.103
% variance explained 28.77% 18.94% 18.59% 13.79% 10.19% 8.24% 1.47%
% cumulative variance explained 28.77% 47.71% 66.30% 80.10% 90.29% 98.53% 100%
Notes: Liquidity proxies are defined in Tables 1 and 2. PC1–PC7 denote principal components.
Eigenvalues larger than unity (PC1–PC3) are marked in bold
Source: Own calculations
4.2 Common Components of Liquidity on the WSE
In this subsection, the PCA empirical results from seven liquidity proxies for the
group of 86 companies on the WSE are reported. In the PCA, input liquidity
variables are converted into new (latent) uncorrelated liquidity variables called
principal components, which are linear combinations of original variables. To get
standardized factors, the correlation matrix is used as input for the PCA.
Table 4 reports seven principal components PC1–PC7 corresponding to the first
to smallest eigenvalues, the loadings of the principal components with the respective
variance that the corresponding eigenvectors explain, and the cumulative variance
explained within the whole sample period. The three eigenvalues that are larger than
unity represent more than 66% of total liquidity variation. According to the Kaiser
0.8
PC1 PC2 PC3
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
%RS %RealS %PI %OR MRoll MT MAmih
Fig. 1 The first three eigenvectors of the PCA within the whole sample period from January 2005
to December 2016 (based on Table 4)
(1958) criterion, these three principal components are sufficient to substitute the
seven liquidity proxies utilized in this study.
Figure 1 presents the first three eigenvectors of the PCA within the whole sample
period that are reported in Table 4. The factor PC1 with the highest eigenvalue
explains about 28.8% of total variance. It combines rising liquidity of the %RS,
%RealS, and MRoll with declining liquidity of the remaining measures. Factor two
(PC2), which explains an additional 18.94% of variance, combines rising liquidity
of the %RealS, MT, and MAmih with declining liquidity of the remaining proxies.
Factor three (PC3) is responsible for another 18.59% of variance and captures
declining liquidity of all liquidity estimates.
4.3 Robustness Analyses
Tables 5, 6 and 7 report principal components PC1–PC7 corresponding to the first

to smallest eigenvalues over three consecutive subsamples: the pre-crisis (Table
5), crisis (Table 6) and post-crisis (Table 7) periods. The results are homogenous
because first three eigenvalues (PC1–PC3) are larger than unity in the case of all
investigated periods. Moreover, the cumulative variance explained is almost the
same within all considered sub-periods. Specifically, the first three eigenvalues
PC1–PC3 represent more than 67% (the pre-crisis period), 66% (the crisis period)
and 68% (the post-crisis period) of total liquidity variation, respectively.
Table 5 The PCA results from the seven liquidity proxies (the pre-crisis period)
1 %RS −0.045 0.709 −0.078 0.093 0.243 −0.622 0.185
2 %RealS −0.703 0.024 0.024 −0.009 0.124 −0.084 −0.694
3 %PI 0.694 0.145 −0.030 0.044 −0.040 −0.097 −0.695
4 %OR 0.089 −0.163 −0.582 −0.320 0.715 0.112 0.003
5 MRoll −0.093 0.596 −0.400 0.057 −0.253 0.639 −0.023
6 MT −0.070 −0.232 −0.656 −0.122 −0.567 −0.419 −0.007
7 MAmih −0.008 −0.201 −0.252 0.932 0.166 0.010 0.009
Eigenvalue 1.920 1.504 1.327 0.960 0.765 0.454 0.071
Notes: Notation like in Table 3
Table 6 The PCA results from the seven liquidity proxies (the crisis period)
1 %RS −0.152 0.332 −0.584 0.009 −0.597 −0.400 0.097
2 %RealS −0.694 −0.059 0.075 −0.029 0.019 −0.094 −0.707
3 %PI 0.678 0.104 −0.175 0.054 −0.072 0.024 −0.700
4 %OR 0.078 −0.486 −0.410 −0.418 0.429 −0.480 0.013
5 MRoll −0.172 0.100 −0.666 0.187 0.357 0.595 0.014
6 MT 0.001 −0.643 −0.087 −0.252 −0.571 0.434 −0.019
7 MAmih 0.012 −0.464 −0.061 0.850 −0.026 −0.240 0.017
Eigenvalue 1.935 1.425 1.323 0.902 0.690 0.626 0.098
Table 7 The PCA results from the seven liquidity proxies (the post-crisis period)
1 %RS −0.344 0.420 0.047 −0.455 −0.012 0.694 −0.119
2 %RealS −0.580 −0.374 −0.057 0.042 0.092 0.093 0.708
3 %PI 0.520 0.473 0.078 −0.084 −0.090 0.029 0.695
4 %OR 0.323 −0.346 0.112 −0.477 0.729 0.064 0.016
5 MRoll −0.375 0.353 0.192 −0.445 0.075 −0.703 0.004
6 MT 0.158 −0.463 0.266 −0.503 −0.661 0.004 0.021
7 MAmih −0.068 0.017 0.932 0.325 0.099 0.105 −0.017
Eigenvalue 2.109 1.635 1.019 0.867 0.699 0.579 0.092
5 Conclusion
The goal of this research was to employ the PCA to extract common components of
liquidity across a broad sample of equities, and from a set of liquidity measures
on the Polish stock market. Seven liquidity proxies, namely percentage relative
spread, percentage realized spread, percentage price impact, percentage order ratio,
modified version of the Roll estimator, modified turnover, and modified Amihud
measure, were utilized.
The empirical PCA results reveal that first three principal components PC1–PC3
seem to capture common sources of liquidity variation on the WSE. The findings
are robust to the sub-period choice. Therefore, one of possible directions for further
investigation could be to assess commonality in liquidity on the WSE with these
three principal components of liquidity proxies as latent factors in econometric
models (e.g. Foran et al., 2015; Korajczyk & Sadka, 2008). To the best of the
authors’ knowledge, no such research has been conducted for the Polish equity
market so far. According to the recent literature, commonality in liquidity on the
WSE is rather weak and robust to the choice of a liquidity measure and a subsample
period (e.g. B˛edowska-Sójka, 2019; Olbryś, 2019). Therefore, the main aim of the
further study could be to confirm or deny this evidence.
Acknowledgements The contribution of the first named author was supported by the grant
‘Comparative research on commonality in liquidity on the Central and Eastern European stock
markets’ from the National Science Centre, Poland, No. 2016/21/B/HS4/02004.
A.1 Appendix
Table 8 presents details concerning the Lee-Ready (LR) procedure. The midpoint
price Ptmid at time t is calculated as the arithmetic mean of the best ask price Pt (a)
and the best bid price Pt (b) at time t: Ptmid = Pt (a)+P
2
t (b)
. Considering that the bid
Table 8 The Lee and Ready (1991) procedure for inferring the initiator of a trade
Conditions
Stage I
Trade is classified as buyer-initiated Trade is classified as seller-initiated
if Pt > Ptmid if Pt < Ptmid
If Pt = Ptmid , then:
Stage II
Trade is classified as buyer-initiated Trade is classified as seller-initiated
if Ptmid > Pt−1 . if Ptmid < Pt−1 .
When Ptmid = Pt−1 , the decision is taken
based on the sign of the last non-zero price
change Pt − k If Pt > Pt − k , then trade is
classified as buyer-initiated If Pt < Pt − k ,
then it is classified as seller-initiated
Source: Olbryś and Mursztyn (2017)
and ask prices are not made public on the WSE, the midpoint price Ptmid at time t is
approximated by the arithmetic mean of the low price PtL and the high price PtH at
time t, which approximate the best ask price and the best bid price, respectively. The
transaction price Pt at time t is approximated by the closing price. The opening trade
is treated as being unclassified according to the LR procedure (Olbryś & Mursztyn,
2017).
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The Mechanism of Political Budget
Cycles in Greece
George Petrakos, Konstantinos Rontos, Chara Vavoura, and Ioannis Vavouras
Abstract Extended empirical research has established the existence of political

budget cycles in Greece but remains agnostic about the mechanism which generates
them. In this paper we contribute to the literature by investigating precisely
this mechanism of the creation of political budget cycles using data from the
Greek economy for the last four decades (1980–2018). We find that it is via the
manipulation of public expenditure rather than through the handling of public
revenue that opportunistic politico-economic behaviour arises. We go on to build a
novel empirical model linking government spending and revenue and estimate that,
in years of general elections, public expenditure rises by around 2.2% of GDP. This
level is not typical of a developed economy. Still, our finding is robust to various
specifications of our model, both linear and non-linear, and hints towards a severe
decline in the underlying political culture of the country. We conclude that, in the
case of Greece, future fiscal rules aiming to suppress the political budget cycles
phenomenon should target the control of pre-election transfer payments instead of
resorting to tax increases.
G. Petrakos
Department of Public Administration, Panteion University of Social and Political Sciences,
Athens, Greece
e-mail: petrakos@panteion.gr
K. Rontos
Department of Sociology, University of the Aegean, Mytilene, Greece
e-mail: K.Rontos@soc.aegean.gr
C. Vavoura
Department of Economics, University of Athens, Athens, Greece
e-mail: cvavoura@econ.uoa.gr
I. Vavouras ()
Panteion University of Social and Political Sciences, Athens, Greece
e-mail: vavouras@panteion.gr
https://doi.org/10.1007/978-3-030-63970-9_9
124 G. Petrakos et al.
Keywords Political budget cycles · Political fiscal cycles · Politico-economic

models · Public revenue · Public expenditure
JEL Classification: D72, E62, H62
1 Introduction
This paper identifies the mechanism generating political budget cycles (PBCs),
a term used to refer to the jump of budget deficits during election years. This
phenomenon is generally interpreted as being triggered by the government’s pursuit
of re-election, and it is played out when incumbents pursue opportunistic fiscal
policies before general elections so as to appear competent and offer voters the
illusion of economic prosperity (Rogoff, 1990; Rogoff & Sibert, 1988). Specifically,
either because they are facing a myopic electorate with a decaying memory of past
events or taking advantage of informational asymmetries that exist between them
and rational constituents, politicians may choose to maximise their own voting
function (Nordhaus, 1975) instead of behaving benevolently by maximising a social
welfare function as is commonly assumed by traditional macroeconomic theory
(Theil, 1956; Tinbergen, 1975).
There are effectively two possible mechanisms that could generate PBCs, either
through excessive public spending or via taxation policies aiming at a suboptimal
level of tax revenue (Alesina, 1987, 1988), each with very different social welfare
implications. Our paper contributes to the literature by tracing the steps taken in
order for PBCs to be created. PBCs on the revenue side take place mainly in the
form of a direct and indirect tax rate reduction, whereas PBCs on the expenditure
side materialise mostly through an increase in transfer payments. Hence, the former
tends to be of practical concern to relatively wealthier and, therefore, less numerous
potential voters. As a result, we argue that revenue-side PBCs seem less likely, and
for the additional reason that they require a considerably more significant time lag
between the reduction in tax rates and the corresponding reduction in tax revenue
and timing is of critical importance in increasing the effectiveness of pre-electoral
fiscal manipulation.
To test our hypothesis that it is expenditure manipulation that gives rise to
PBCs, we propose a novel empirical model to examine how the political cycles
affect public spending and public revenue. To confidently construct our model, we
look into the connection between elections and the dynamic evolution of the two
aforementioned macroeconomic variables. There is an important, although nuanced,
relationship between current expenditure, past expenditure and current revenue.
How the latter two shape the former has been a matter of an extended debate which
is key in the PBCs literature. For example, de Haan and Klomp (2013) consider
expenditure to be a function of its lagged values, whereas Shi and Svensson (2006),
among others, take the approach that the level of expenditure of a given year is
influenced not only by its own past values but also by the level of current revenue.
The Mechanism of Political Budget Cycles in Greece 125
Our focus is on Greece during the period between 1980 and 2018. It is well recog-
nised that, over the past four decades, the Greek economy has been characterised by
severe PBCs both at the national (De Haan & Klomp, 2013; Vavoura, Vavouras,
Rontos, & Petrakos, 2019) and at the municipal level (Chortareas, Logothetis, &
Papandreou, 2016).1 And although the existence of the cycles has been repeatedly
investigated, the path of their occurrence has not yet been confidently described.
This paper is, to our knowledge, the first to explore whether the generating
mechanism of the PBCs in Greece is expenditure or revenue-driven and settle on
a causal link between public expenditure and public revenue.
Our work relates to the broad political business cycles literature2 and is particu-
larly relevant to the emerging new empirical literature emphasising the size limiting
effect of fiscal rules on PBCs (Bonfatti & Forni, 2019; Gootjes, de Haan, & Jong-
A-Pin, 2019; Vavoura et al., 2019). The ability of governments to create PBCs is
found to be decreasing in the level of economic and social development, the quality
of institutions and the transparency of the political process (De Haan & Klomp,
2013). Most crucially, PBCs appear to be reduced in the presence of fiscal rules.
We contribute to this literature by using our framework to derive interesting policy
implications which could help redesign such rules more effectively.
The structure of our paper is organised as follows. In Sect. 2, we present our
methodology and discuss our findings. In Sect. 3 we conclude.
2 Methodology and Results
In order to explore the mechanism that generates PBCs, we follow an empirical

approach based upon annual administrative data from 1980 to 2018, following the
standard PBCs literature (Chortareas et al., 2016; De Haan & Klomp, 2013; Sakurai
& Menezes-Filho, 2011; Shi & Svensson, 2006; Veiga & Veiga, 2007). We use six
variables and follow the definition of Eurostat for variables (1)–(5):
1. The general government total expenditure (GGE), as percent of GDP.
2. The general government total expenditure of the previous year (GGE-1) as
percent of GDP.
3. The general government total revenue (GGR) as percent of GDP.
1 De Haan and Klomp (2013) use data for the period 1975–2005, Vavoura et al. (2019) use data
that cover the period 1980–2017, while Chortareas et al. (2016) use data that cover the period
1985–2004.
2 See, for example, Rogoff and Sibert (1988), Rogoff (1990), Alesina, Cohen, and Roubini (1997),
Persson and Tabellini (2000), Brender and Drazen (2005, 2008), Shi and Svensson (2006) and
Bonfiglioli and Gancia (2013). Notice that political budget cycles materialise through an increase
in the budget deficits as opposed to political business cycles that occur when politicians in
power exploit the short-run Phillips curve by increasing the rate of inflation, in order to reduce
unemployment levels. For a review of the transition from the political business cycle to political
budget cycle, see Efthyvoulou (2012).
4. The general government total revenue of the previous year (GGR-1) as percent
of GDP.
5. The growth rate of the real total GDP (TYGR) since a declining growth may put
additional pressures on incumbent politicians in power to increase public deficit
before elections.
6. Election (ELEC), a dichotomous variable taking the value of 1 in the years of
general elections in Greece and 0 otherwise.
To test whether PBCs are driven by an increase in expenditure or a decrease
in revenue, we use three models. In Model (1) we look into the formation of
public revenue. Let y1i denote the observed annual GGR, considered as the response
variable on the ith time segment (i = 1,2, . . . ,37), covering the period between 1980
and 2018. Let z1i = y1i−1 denote the observed values of the 1-year lag of the GGR
(GGR-1 or variable Z1 ), and let z2i denote the value of Z2 , corresponding to the
total GDP growth rate (TYGR) variable. Also, let eleci denote the observed values
of the dichotomous variable ELEC. In this context, revenue-side PBCs would yield
a statistically significant coefficient of the election variable. We assume that the
mean of the response variable can be modelled as a linear combination of both the
quantitative and dichotomous variables in the following way:

2
E (y1i ) = β0 + βj zj i + γ eleci (1)
j =1
Model (1) presents a very good overall goodness of fit as the R2 = 95.1%
(R2 adj = 94.66%), while the F-test indicates overall statistical significance
(F = 219.78, df = 3, p-value = 0.00) and the DW statistic equals 2.29536. The
coefficients of the model are statistically significant except for the elections variable,
and they are reported in Table 1. We conclude that PBCs are not created through a
drop in public revenue triggered by a decrease in tax rates before a general election.
PBCs should, therefore, arise via a boost in public expenditure. As a result, public
revenue is found to be best approximated by a model (Model 1.1) that includes only
GGR-1 and TYGR as regressors. Model (1.1) presents a very good overall goodness
of fit as the R2 = 95.1% (R2 adj = 94.82%). The economic intuition behind Model
(1.1) is that public revenue is persistent, slowly adjusting overtime.
Moving on to Model (2), we now test the hypothesis that PBCs are in fact
generated on the expenditure side. Let y2i denote the observed annual GGE,
considered as the response variable on the ith time segment (i = 1,2, . . . ,37),
covering the period between 1980 and 2018. Let x1i = yi−1 denote the observed
Table 1 Regression Variables Coefficient Standard error p-value VIF

coefficients of Model (1)
Constant 2.74 1.47 0.071
GGR-1 0.9472 0.0375 0.000 1.01
TYGR −0.1613 0.0741 0.037 1.01
ELEC −0.001 0.55 0.999 1.02
values of the 1-year lag of the GGE (GGE-1 or variable X1 ). In addition, let x2i
denotes the value of X2 , corresponding to TYGR variable and x3i the value of
X3 corresponding to the GGR. Finally, let eleci denote the observed values of
the dichotomous measure ELEC. We start off by assuming that the mean of the
response variable can be modelled as a linear combination of both the quantitative
and dichotomous variables in the following way:

3
E (y2i ) = β0 + βj xj i + γ eleci (2)
j =1
(R2adj = 82.6%), while the F-test indicates overall statistical significance
(F = 44.93, df = 4, p-value = 0.00) and the DW statistic equals 2.24878. The
coefficients of the model are statistically significant and economically meaningful
and they are reported in Table 2 (Fig. 1).

coefficients estimation of
Model (2) Constant 10.3 3.01 0.002
GGE-1 0.580 0.121 0.000 3.91
TYGR −0.255 0.127 0.053 1.07
GGR 0.236 0.124 0.065 3.80
ELEC 2.261 0.920 0.019 1.02
Fig. 1 Diagnostics of Model (2)

As Table 2 indicates, during years of general elections, public spending increases

by 2.261% of GDP, thus implying that Greece is characterised by severe PBCs.
This result goes in the direction of Vavoura et al. (2019) and de Haan and Klomp
(2013), at the national level, and Chortareas et al. (2016) at the municipal level in
documenting the existence of PBCs in Greece. Quantitatively, the PBCs that we
document are disproportionately high in relation to other developed economies,
which tend to have cycles that vary from well below 1% of GDP to insignificant
(De Haan & Klomp, 2013). This result is a strong indication that, over the last four
decades, Greece has had the socio-political characteristics of a developing economy
rather than those of a developed one. In comparison to the works of Andrikopoulos,
Loizides, and Prodromidis (2004), who analyse the period between 1970 and 1998
and find no evidence on the existence of PBCs, and de Haan and Klomp (2013)
who report small PBCs during 1975–2005, we conclude that PBCs have become an
increasingly pressing matter for the Greek economy.
However, VIF values for GGE-1 (3.91) and GGR (3.80) indicate multicollinear-
ity issues among predictors. Preliminary analysis of the relationship between the
two variables results in a significant Pearson Correlation Coefficient of 0.857 and
a Spearman Correlation Coefficient of 0.780. These results mean the inclusion of
current revenue as well as past expenditure as explanatory variables, in line with
the literature following Shi and Svensson (2006), causes bias. Analysing further
the relationship between revenue and expenditure (Fig. 2), a strong and sharp
linear positive relationship for the smaller values of GGR (<35) is revealed. In
contrary, for larger values of GGR (>35) the relationship between the two variables
is neither strong nor sharp. The economic intuition behind Fig. 2 is that when
public expenditure as percentage of GDP is relatively low, then it is mainly financed
by public revenue and so the two variables are positively linked. For increased
levels of spending though, public revenue as percentage of GDP, which is not
associated with high fluctuations, becomes relatively less important in financing
public expenditure, compared to borrowing, and, hence, the strong relation between
revenue and expenditure disappears.
In Table 2, we also report that the coefficient of the GDP growth rate (TYGR)
is equal to −0.255% of GDP, meaning that during times of economic slowdown,
corresponding to decreasing growth rates, governments tend to respond with
expansionary fiscal policies. However, the p-value of (TYGR) is as high as 0.065,
which seems counterintuitive. One way to understand this is that the effect of
economic growth on current expenditure is partly absorbed by the inclusion of the
lagged variable GGE-1.
Given the multicollinearity problems of including both GGE-1 and GGR, we
move on to the examination of Model (3). In Model (3), we drop GGR and consider
(2) but having as predictors only the variables GGE-1, TYGR and ELEC, as follows:

2
E (y2i ) = β0 + βj xj i + γ eleci (3)
j =1
Fig. 2 The relationship between general government expenditure and revenue

Model (3) Constant 10.24 3.12 0.002
GGE-1 0.778 0.066 0.000 1.06
TYGR −0.235 0.132 0.083 1.06
ELEC 2.210 0.955 0.027 1.01
(F = 54.45, df = 4, p-value = 0.00), but the DW statistic equals 2.65171 indicating
some autocorrelation issues. The coefficients of the model are reported in Table 3
(Fig. 3).
From Model (3), which follows de Haan and Klomp (2013), we get that the effect
of the PBCs is very robust to different specifications of the model. Besides, a linear
model without GGR, including only lagged GGE (GGE-1) and the GDP growth
rate (TYGR) as regressors, as well as the election dummy, does not suffer from
multicollinearity but is susceptible to autocorrelation.
Finally, bearing in mind that the diagnostics figures (residuals vs fitted) show
evidence of nonlinearity, we formulate our final model. Model (4) is a novel
empirical model in which we replace GGE-1 with the combination of GGR and
GGR2 :
Table 4 Regression Variables Coefficient Standard error p-value

Model (4) Constant −43.6 11.5 0.001
TYGR −0.614 0.139 0.000
GGR 4.123 0.640 0.000
GGR2 −0.045 0.009 0.000
ELEC 2.180 0.944 0.027

3
E (y2i ) = β0 + βj xj i + β4 x3i
2
+ γ eleci (4)
j =2
(F = 53.60, df = 4, p = 0.00). The coefficients of the model are statistically
significant and economically meaningful, and they are reported in Table 4 (Fig. 4).
Model (4) shows that when exploring the generating mechanism of PBCs,
linear models are inadequate. When the lagged value of public expenditure is
removed from the model, all our variables become statistically significant at the
5% level. Moreover, the growth rate becomes a crucial determining factor of public
expenditure, just as intuition dictates. Regarding the relationship between current
expenditure and current revenue, we find that:
∂GGE ∼
= 4.123 − 0.09GGR (5)
∂GGR
Equation (5) implies that the effect of current revenue on current expenditure
changes sign (from positive to negative) at a level of GGR ∼ = 45.8. This value is
similar to the one in Fig. 2 (bearing in mind that Fig. 2 shows the relation between
GGR and GGE-1). Finally, it is striking that regardless of the approach (linear vs
non-linear) and the variables we include as regressors, the magnitude of PBCs is
robust, and it amounts to a 2.2% of GDP increase in public expenditure.
From the analysis presented above, we can conclude that, over the last four
decades, the Greek economy has been characterised by severe PBCs of about 2.2%
of GDP. These cycles are of alarming magnitude, given that PBCs in developed
countries lie between well below 1% of GDP and insignificant (De Haan & Klomp,
2013) and indicate a severe decline in the underlying political culture of the country.
These PBCs have largely driven the excessive and persistent public deficits and the
resulting debt crisis that devastated the Greek economy for the last 10 years and
cost the country more than one-fourth of its GDP per capita (Vavouras, 2019). As
a result of the crisis, the European Union implemented strict fiscal rules, mainly in
the form of the excessive deficit procedure under the corrective arm of the Stability
and Growth Pact. Such fiscal rules have been found to suppress politicians’ ability
to create PBCs (Bonfatti & Forni, 2019; Gootjes et al., 2019; Vavoura et al., 2019).
By highlighting the mechanism that generates PBCs, we add to the literature by
deriving economic policy implications useful for the design of effective fiscal rules.
In particular, our results show that, in the case of Greece, fiscal rules aiming to limit
the impact of PBCs should target the control of pre-election transfer payments rather
than resorting to tax increases.
3 Conclusions
In this paper, we show that PBCs in Greece arise due to a sharp increase of
around 2.2% of GDP in the level of public expenditure during election years, and
the magnitude of these cycles is robust to different specialisations of the model
describing the evolution of public expenditure. As a result, we find that, over the
last 40 years, the Greek economy has been characterised by severe PBCs which are
not characteristic of a developed but rather a developing economy.
Our contribution is twofold. First, our work adds to the literature on the effect
of fiscal rules on limiting PBCs because we can use our findings that PBCs are
expenditure-oriented to justify the imposition of fiscal rules aiming at the reduction
of transfer payments, rather than the ones focused on increasing tax rates in order to
tackle opportunistic budgetary behaviour on the side of the Greek governments.
Second, on a technical level, we move away from the linear model, currently
the workhorse of the PBCs empirical literature, leveraging on the fact that public
revenue and public spending appear to have a non-linear relationship. We end up
with a quadratic model linking the two variables which works well for our limited
dataset. However, the next task of research within this model would be to explore
even more sophisticated relationships between our key macroeconomic variables
with the use of larger and richer datasets.
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Examination of Business Interest in Level
of Complexity of Facial Biometric
Technology Implementation in Slovakia
Michal Budinský and Janka Táborecká-Petrovičová
Abstract Increase in the requirement of still more demanding customers forces

businesses to improve their processes, especially in meeting their needs with the
highest efficiency. In order to reach this aim, one of the possibilities is utilization
of new technologies, what improves whole business performance at all. It is not
a secret that biometric technologies are spreading quickly within distinctive sectors
and their popularity increases. Related to this, utilization range of these technologies
in private sectors and the required level of their complexity is an interesting issue
for examination. The main aim of this paper is to reveal the level of complexity of
facial biometric technology implementation, which businesses operating in Slovakia
would be interested in. Notably, we devoted our attention to the identification of
certain level of complexity among business, we focused on identification of possible
relationship between complexity level and added value/usefulness or AIDA/STDC
model. Within our research was proved assumption that at least half of businesses in
Slovakia are interested in some form of facial biometric technology implementation.
In addition, our research confirmed dependence between the required level of
implementation complexity and distinctive factors. Based on the results were
formulated several managerial implications. This paper contains partial results of
complex research focused on the examination of market potential of facial biometric
technology implementation in Slovakia.
Keywords Biometric technologies · Facial biometrics · Market potential
1 Introduction
Competition on a market is increasing on its intensity recently, while almost all

business processes are slightly changing and become even more difficult to be
managed. If businesses want to plan their activities and strategies properly, they
M. Budinský · J. Táborecká-Petrovičová ()

Faculty of Economics, Matej Bel University, Banská Bystrica, Slovakia
e-mail: michal.budinsky@umb.sk; janka.taborecka@umb.sk
https://doi.org/10.1007/978-3-030-63970-9_10
136 M. Budinský and J. Táborecká-Petrovičová
need to obtain more and more precise data about their customers. For this purpose,
serve them CRM systems, loyalty programs, or marketing information systems.
These traditional tools are useful, but slowly they are not enough to secure advanced
requirements of customers. While the trend of gathering, processing, and analyzing
data directs to the utilization of the newest technologies. Notably, biometric
technologies are becoming more often utilized for the purposes of customer data
gathering, even though they were initially developed for public sector and security
enhancement. Therefore, it is not a surprise that day-by-day are released more
references to biometrics or biometric technologies utilization, their importance, or
questionability of its usage. In terms of this, we consider interesting to investigate
what certain level of implementation complexity of facial biometric technology,
would be businesses operating in Slovakia interested in.
2 Theoretical Background on Facial Biometric Technology
First mention related to the origin of biometrics is connected with the Chinese cul-
ture of fourteenth century, where vendors stamped footprints and palm of children
on a paper, in order to distinguish them. Lately, in 1880s Bertillon and Clerk draw
up a method for identification of criminals, based on a multiple body measurement,
which was lately took over by police and used in crime investigation. Thus, we
may see that biometrics itself is not a novelty and its evolution has undergone
several steps of its development. In addition, in the last decade, it significantly
influenced the fundamental perception of security or property protection (Jones,
Williams, Hillier, & Comfort, 2007). Different forms of biometric systems are used
around the world in many distinctive areas. We can see their application in public
sphere, banking and insurance sphere, and also in various commercial stores abroad.
Biometrics is becoming a natural part of our life, which is proven by increased
amount of biometric systems we are getting in a touch recently. Usage of biometric
technologies opens huge opportunity for businesses in obtaining and processing
various data about customers (Jones et al., 2016).
Interesting perspective was brought by Heracleous and Wirtz (2006) where
they understand biometrics as a tool for authentication or identification of persons
based on physiological features. In addition, they identified that main advantage
of biometrics lies in higher practicability and security against some identifier you
know, such as entry passwords. Moreover, it is more practical and secure than
something you have, such as ID cards, token, or some card keys. Thus, there is
no possibility of lost, forgetting, or copying biometrics features, especially in a case
of multi-biometric technologies.
In general, there arise a number of possibilities for biometrics usage in public
sector. Governments around the whole world utilize distinctive biometric systems
for better identification of persons. It is not a surprise that leader in this field is
the USA, where government itself develops systems for fingerprint identification,
electronic passports, or many others. On the other hand, for example, Great Britain
Examination of Business Interest in Level of Complexity of Facial Biometric. . . 137
implemented ID cards with biometric features or within European Union integration

of biometric passports is becoming a standard in the field of person identification.
However, the space for implementation of these systems is much broader (Acharya
& Kasprzycki, 2010). Taking a look at examples of successful implementation of
biometric technology in commercial sphere, we can mention for example Japanese
stores, where faces of customers are recorded and encoded based on biometric
system and later shared among 115 stores in order to prevent thefts and robberies.
Software-developing company based in Nagoya introduced this system in 2013 as
prevention against thefts. According to the law, businesses involved in a system can
share this data, but they are not allowed to provide them to the third parties (Davis
West, 2018).
Biometrics at all represents sophisticated technology, which is able to identify
unique physical and behavioral feature with the main purpose of its backward
identification (Shyam & Singh, 2016). Moreover, different commercial systems and
algorithms were developed in the past because interest for face recognition systems
increased in the context of immigration in many countries, especially on places such
as airports and ports, where facial recognition systems were implemented after the
US terrorist attacks on September 11 (Shin, Kim, Lee, Shin, & Choi, 2008).
Moreover, according to Rouse (2018), facial biometric technologies belong to
that category of biometric software which is able to map characteristics of a person’s
features mathematically. These technologies are based on advanced algorithms
which compare digital images or live captures with database face-prints for the
purpose of verification.
Related to the studied issue, we consider necessary to briefly introduce AIDA
model of purchase behavior, as we will investigate its potential relationship with the
required level of complexity. This model describes degree of customer readiness
within purchase behavior. Firstly, we are talking about attention, which is also
called as “awareness” and refers to if consumers find a product as an attractive.
Consequently, when product has attention, it is very important to keep it, what is
sometimes more difficult. In this step, we are talking about creation of interest.
Next, after attention and interest were developed, desire for product is required to
be established. Finally, the last step is about calling a consumer for action, thus to
purchase a product/technology. It means that, based on the stage of AIDA model
among consumers, their perception of new technology market potential is different
(Suggett, 2017).
In addition, recently a new model of consumer buying process identification
appeared that is very similar to the AIDA, but goes a little bit further. Specifically,
we are talking about “See-Think-Do-Care” (STDC) model, which is a partially
analogy of AIDA model. Within STDC model, a very fist stage “See” refers
to a group of potential customers that currently gained basic information about
product/service and create wide audience. Next stage, “Think” is represented
by those customers that have an interest in product or consider their purchase.
Following stage of “Do” is connected with customers definitely decided about
purchase of the product/service or those who already made purchase. The last step
of this model, “Care,” refers to the customers who made at least two purchases of
the product, and the aim of business is to care about them (Hart, 2018). In general,
we can see an analogy between these two models, especially in the first two phases.
Further in our research we used these concepts to formulate respective question in
the survey.
3 Methodology of Research
The main aim of this paper is to reveal the level of complexity of facial biometric
technology implementation, which businesses operating in Slovakia would be
interested in. Notably, we devoted our attention to the identification of certain
level of complexity among business, later we focused on identification of possible
relationship between complexity level and added value/usefulness or AIDA/STDC
model. In order to investigate these issues, we performed primary research. In
relation to fulfillment of main aim, we have formulated hypothesis H1 .
H1 : We assume that at least half of businesses will be interested in some form of facial
biometric technology implementation in their business.
For the purpose of this study, we realized quantitative research, where question-
ing was applied as a data gathering method and as a tool we used a questionnaire
survey.1 In this research, we approached businesses of relevant size and from
different industry, but operating in Slovakia. For the purpose of data collection
process, we used two different forms. Firstly, students from Faculty of Economics at
Matej Bel University participated as field researchers in this survey who contacted
businesses across Slovakia to fill up questionnaire with adequate representa-
tives. Secondly, after the process of data collection from students terminated, we
approached businesses in Slovakia by email. For this purpose, an online version of
our questionnaire was created in Google Docs application. In order to approach as
many businesses as was possible, we decided to utilize access to database of contacts
through analytical portal. This process lasts 3 months from September to November
of 2019. Within our questionnaire, we utilized questions with semantic differential
statements, basic optional questions, or level of agreement statements, enhanced
by seven-point Likert scale to ensure sufficient range of options. For verification
of hypotheses and statistical testing of various relationships within the study, we
utilized correlation analysis, especially Spearman correlation coefficient.
In the context of our research, we focused on businesses with at least ten
employees, therefore small, medium, and large businesses, because potential of this
technology in micro-businesses is very small, and we do not expect their interest
in facial biometric technologies implementation. Finally, from data collection
process, we were able to reach 521 complete answers that follow representativeness
1 Results
presented in this paper are part of the research solved within the national grant VEGA
1/0488/20 Market, marketing, legislative and ethical aspects of biometric technologies utilisation
in commercial sector (2020–2022, project leader: Janka Taborecka-Petrovicova).
3,26%
17,47%
79,27%
10 - 49 employees 50 - 249 employees more than 250 employees
Fig. 1 Distribution of businesses according to the number of employees
criteria (research sample representative by two signs—size of business/number of

employees and region/business residence).
Within our research, we collected 521 complete answers, while the structure
of these respondents can be divided into distinctive groups according to the
identification criteria. We decided to distribute these respondents according to the
criteria: business activity, ownership, average annual revenues, business size, and
region. Our research samples were 189 of manufacturing businesses (36.28%), 62
of wholesalers (11.90%), 47 of retailers (9.02%), and 223 businesses from service
(42.80%). Further from total amount, 371 of businesses (71.21%) are owned solely
by Slovak owners, 19 of businesses (3.65%) are owned mostly by Slovak owners, 11
of respondents (2.11%) are half owned by Slovak and half owned by foreigners, 32
businesses (6.14%) are mostly owned by foreign owners, and finally 88 of business
(16.89%) are solely owned by foreign owners. Later, our research sample consists
of 236 businesses (45.30%) with average annual revenues less than 2 million A C,
180 businesses (34.55%) with average annual revenues between 2 and 10 million
A
C, 75 of businesses (14.40%) with average annual revenues between 11 and 50
million AC, and 30 of businesses (5.76%) with average annual revenues higher than
50 million AC. Research sample consists of 79.27% (413) of small business with 10–
49 employees, 17.49% (91) of medium-size businesses with 50–249 employees, and
finally 3.26% (17) of large businesses with more than 250 employees. Distribution
is reflected in Fig. 1.
Firstly, we focused on revealing interest of respondents in the level of complexity

of facial biometric technology implementation into the business processes. Through
our research, we found out that 51.63% (269) of respondents do not have interest
Fig. 2 Distribution of 3,26%

businesses by interest in level 6,91%
of complexity
implementation
38,20% 51,63%
no interest basic implementation

advanced implementation complex solution
in any form of facial biometric technology implementation. On the other hand,

38.20% (199) of respondents are interested in single/basic form of implementation
of facial biometric technology. In addition, in our research sample, 6.91% (36) of
respondents were interested in advanced functionalities of this technology and its
implementation to the business. Finally, answers of the respondents revealed that
3.26% (17) of businesses have an interest in complex solution of facial biometric
technology and its integration to all business processes. Distribution of respondents
according to their interest in the level of complexity of facial biometric technology
is depicted in Fig. 2.
Even though the amount of not interested respondents is relatively high and
represent half of the approached businesses, it is still positive finding that almost
half of the addressed respondents would have interest in at least little form of facial
biometric technology implementation. This fact revealed us interesting information
about the potential of this technology on a market as well as this issue is still very
young in Slovakia.
Related to the required level of complexity of facial biometric technology
implementation, we need to verify our hypothesis H1 , where we assume that at
least half of businesses will be interested in some form of face biometric technology
implementation in their business. For this purpose, we utilized Binominal test via
SPSS program and statistically tested this assumption. The results of binominal
test showed us that as p-value (0.483) is not lower than alpha (0.05) we do not
reject 0 hypothesis, thus it means that there is exactly 50% of businesses that are
interested in some form of implementation of this technology. As 50% fall under the
scope of our prediction (at least 50%), we can conclude that the hypothesis H1 was
confirmed. The result of binomial test is reflected in Table 1.
It is important to mention that this question as well as answers on this question
serve us as filter of our respondents. In this point, we can divide our respondents
into two groups—those who do not have interest in any form of facial biometric
technology implementation and those who have interest in any form of facial
biometric technology implementation. For further processing of our paper, 48.47%
(252) of respondents represent the basis on which we will focus, when identifying
Table 1 Confirmation of Hypothesis H1
Binomial test
Category N Observed prop. Test prop. Exact sig. (two-tailed) Exact sig. (two-tailed)
Level of complexity Interested in at 2 252 0.48 0.50 0.483 .483a
least single
form of imple-
mentation
No interest 1 269 0.52
Total 521 1.00
a Exact results are provided instead of Monte Carlo for this test
Examination of Business Interest in Level of Complexity of Facial Biometric. . .
141
Table 2 Correlations between AIDA/STDC model and level of complexity

Correlations
Stage of AIDA model
Spearman’s rho Stage of AIDA model Correlation coefficient 1000
Sig. (two-tailed) .
N 521
Level of complexity Correlation coefficient .282a
Sig. (two-tailed) .000
N 521
a Correlation is significant at the 0.01 level (two-tailed)
their expectations, purchase intention, relationships between variables, and reveal-

ing potential of facial biometric technology on a market.
Finally, we took a look also at relationship between AIDA/STDC model and
required level of complexity of facial biometric technology implementation. For
this purpose, we used combination of previous mentioned AIDA and STDC models
according to Suggett (2017) and Hart (2018). In our research, we found out that 35
(6.72%) of respondents are before stages of AIDA model, thus they have never heard
about facial biometric technologies before. On contrary, majority of respondents,
together 450 (86.37%), expressed that until now, they have just heard about facial
biometric technologies, thus they belong to the first stage of this model. Next, only
15 (2.88%) of respondents are in second stage of AIDA/STDC model, hence they
have heard about this technology and consider its purchase. On the other hand, only
four respondents (0.77%) are in third stage, which refers to decision-making process
about which facial biometric technology to purchase. Finally, we were surprised
that in our research sample, 17 businesses (3.26%) already use facial biometric
technology in their business, therefore they are fourth stage of this model.
In this case, results of statistical test showed us that there is statistically signif-
icant relationship between these variables with direct medium-strong dependence
(Spearman’s rho = 0.282), as p-value (0.00) is lower than alpha (0.01). This finding
means that, with increased stage of AIDA model among businesses, their interest
for more complex solution of this technology rises. We can interpret it the way
that during the “journey” through particular stages of AIDA/STDC businesses are
acquiring more detailed and specific information; they become more educated and
hence they can see a full potential of this technology. Results of correlation analysis
are shown in Table 2.
When discussing opinions of businesses on facial biometric technology, we
were interested in overall added value perceived by respondents. We found out
that only 3.45% (18) of respondents perceive high added value for their business
from implementation of facial biometric technology, followed by 6.14% (32) who
perceive relatively high added value. Only 22.26% (116) of businesses perceived
added value above average, while 38.77% (286) of businesses stated that their
expected added value is below average. This fact could be caused due to not wide-
spread information about this technology, or due to different associations with
Table 3 Correlations between added value and level of complexity

Correlations
Added value Level of complexity
Spearman’s rho Added value Correlation coefficient 1000 −.572a
Sig. (two-tailed) . .000
N 521 521
Level of complexity Correlation coefficient −.572a 1000
Sig. (two-tailed) .000 .
N 521 521
usage of this technology (probably price, difficulty of its implementation, trade-off

between costs and benefits, etc.).
In the next step, we were interested in perceived added value by businesses in
relation to complexity. Based on statistical test of Spearman correlation coefficient,
we found out that there is statistically significant relationship with indirect medium-
strong dependence (Spearman’s rho = −0.572) between perceived added value and
level of complexity of technology implementation because p-value (0.00) is lower
than alpha (0.01). Results are presented in Table 3. Therefore, according to the
character of questions and statements, businesses which perceive higher added value
from implementation of facial biometric technology are interested in more complex
form of technology implementation. This correlation seems to be logic because
required level of complexity should rise with increased added value perception as a
result of positive attitude.
While considering added value, we were interested also in overall perception of
businesses about usefulness of this technology. In order to reveal this issue, we used
simple question based on seven-point Likert scale in order to provide enough space
for respondents to express their opinion. Based on information from graph above,
we can conclude that perceived usefulness of facial biometric technology among
business in Slovakia is relatively low. Specifically, only 5.57% (29) of respondents
see this technology as completely usable for their business, and 5.76% (30) of
respondents see technology as relatively usable. On the other hand, 23.99% (125) of
respondents perceive facial biometric technology as relatively useless, while 14.78%
(77) of all respondents perceive this technology as completely useless for their
business. Finally, 18.62% of business were indecisive in this question.
In addition, in examination of this question, we have revealed relationship
between perceived usefulness of facial biometric technology and required level
of complexity by businesses. According to the Spearman correlation coefficient,
statistically significant relationship between these variables with indirect medium-
strong dependence (Spearman’s rho = −0.589) was confirmed, as well as p-value
(0.00) is lower than alpha (0.01). Table 4 represents the results of correlation
analysis. This means that, according to the character of questions and statements,
with increased level of usefulness perceived by businesses, increases also their
interest for more complex implementation of this technology.
Table 4 Correlations between level of complexity and usefulness

Correlations
Level of complexity Usefulness
Spearman’s rho Level of complexity Correlation coefficient 1000 −.589a
N 521 521
Usefulness Correlation coefficient −.589a 1000
N 521 521
Since we are interested in examination of market potential of facial biometric

technology, we considered as necessary to address also the purchase intention
of businesses operating in Slovakia. Measuring purchase intention of respondents
in case of such high-end facial biometric technology is not very easy through
questionnaire, due to possible lack of information background necessary for
decision-making of respondents. In order to reveal purchase intention of business
in Slovakia to facial biometric technology, we applied procedure of Heijden and
Verhagen’s (2004; In: Kwon, 2012). In this case respondents were asked to express
their opinion on seven-point Likert scale to three statements (no purchase intention,
purchase intention, and indecisive). Consequently, their answers have been averaged
and classified into three categories. Values from interval <1;4) states for those
who agreed with statements, therefore purchase intention was confirmed. On
the other hand, values from interval (4;7> represented those who did not agree
with statements (purchase intention was not proved). We revealed that among
58.59% (150) of respondents were not identified purchase intention related to facial
biometric technology. However, 31.64% (81) of respondents showed purchased
intention for facial biometric technology. The rest of respondents 9.77% (25) did
not show any marginal results because their mean values were equal to 4.
Finally, we took a look at relationship between required level of complexity
of facial biometric technology implementation and business’s purchase intention.
Apparently, we expected that with increased level of complexity of implementation
by businesses, purchase intention would be higher. According to the results of Spear-
man correlation test, statistically significant relationship between these variables
with indirect medium-strong dependence (Spearman’s rho = −0.443) was approved
because p-value (0.00) is lower than alpha (0.01). Results are shown in Table 5.
Therefore, we can say that businesses which are interested in more complex form
of implementation of facial biometric technology showed higher purchase intention
for this technology.
Related to the required level of complexity by interested businesses, we found
out that majority 38% of them demand single/basic form of implementation of this
technology. Thus, they do not intend to expand its usage in all business processes,
but only to individual activities. At first, based on these findings, we recommend
businesses commercializing facial biometric technology to be close to the customer
Table 5 Correlations between purchase intention and level of complexity

Correlations
Level of
Purchase intention complexity
Spearman’s rho Purchase intention Correlation coefficient 1000 −.443a
N 252 252
Level of complexity Correlation coefficient −.443a 1000
N 252 521
and to offer them what they look for. Therefore, they should create a simple
option/package for businesses within implementation of this technology, where they
could choose for example 1 or 2 functionalities that will be activated according to
their preferences. On the other hand, we suggest to create the packages that would
contain advanced up to the complex implementation option for businesses and to
present these packages on personal meeting in order to attract customers. From
sales point of view, we know that sometimes customer do not know exactly what
he wants, until you show it to him. Thus, in personal meetings, advanced forms of
implementation of this technology can also be presented as a further possibility or
extension opportunity. This may attract them and broaden their perspective about
usage of this technology and create real interest for more complex solutions. We
should not forget that there are also specific/individual customers that are more
demanding and could have specific requirements for complex solutions. Hence,
individual approach to these customers is inevitable, in order to satisfy their needs
and expectations.
5 Conclusion
Results of this paper proved that among half of businesses operating in Slovakia
prevail interest for implementation of facial biometric technology at least in single
form. Further, study confirmed dependence between required level of implementa-
tion complexity and distinctive factors, such as higher complexity required when
among businesses prevail higher added value from usage of this technology or
see higher usefulness. In addition, positive relationship between reference to a
particular stage of purchase behavior according to AIDA model and required level
of complexity was approved.
Next practical contribution of our paper represents identification of interest for
certain level of complexity of facial biometric technology implementation among
businesses in Slovakia. These findings are valuable for businesses developing and
commercializing this technology on a market because they are concerned about
what specific form of implementation would be their potential customers interested

in. This data provides a picture about level of customer demand and enable
businesses to adapt technology as well as its functionalities in compliance with their
requirements.
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www.thebalance.com/get-to-know-and-use-aida-39273
Innovation and Sales Growth Among
Heterogeneous Albanian Firms: A
Quantile Approach
Blendi Gerdoçi and Sidita Dibra
Abstract This study contributes to the stream of research that critically questions
the relationship between innovation and firm’s growth performance. Using the 2019
World Bank Group enterprise survey data, Ordinary least square (OLS) and Quantile
regression (QR) have been employed to examine the effect of various measures
of innovation on the sales growth of Albanian firms. The two-regression analysis
offer inconsistent results. OLS study results show that the adoption by firms of
new processes is the only innovation measure that positively affects sales growth.
Controversially, the more nuanced QR results show that the impact of innovation
on sales growth is significant only for those firms located at the 90th percentiles.
Product innovation and internal R&D appear to be the drivers of high-growth firms’
performance. Surprisingly, process innovation and external R&D have a negative
impact on the growth performance of such firms. For the rest of the quantiles, the
results show that innovation does not affect sales growth. Our study results show that
innovation explanatory power is weak and noteworthy only for high-growth firms.
Keywords Innovation · Firm growth · Quantile regression · Albania ·

Transition countries
1 Introduction
In his seminal work, The Theory of Economic Development (1934), Joseph

Schumpeter argued that innovation is an essential driver of economic growth.
Schumpeter’s theory, built around the innovative entrepreneur, views markets as a
dynamic arena where heterogeneous firms compete with each other by introducing
new products, processes, and ways of doing business. Theoretical models rooted
in the Schumpeterian thought which take a macroeconomic perspective (e.g.,
B. Gerdoçi · S. Dibra ()

Faculty of Economy, University of Tirana, Tirana, Albania
e-mail: blendigerdoci@feut.edu.al; siditadibra@feut.edu.al
https://doi.org/10.1007/978-3-030-63970-9_11
148 B. Gerdoçi and S. Dibra
Aghion, Bloom, Blundell, Griffith, & Howitt, 2005; Nelson & Winter, 1982) have
contributed to the view of innovation as an engine of growth.
At a micro-level, innovation is often associated with increases in productivity
and competitiveness and, consequently, the firm’s growth. Empirical research
focused on developed economies has found that sales growth is positively linked to
investment in R&D and patents (Demirel & Mazzucato, 2013), product innovation
(McKelvie, Brattström, & Wennberg, 2017; Na & Kang, 2019; Roper, 1997), pro-
cess innovation (Cohen & Klepper, 1996), or a combination of different innovation
measures (Bianchini, Pellegrino, & Tamagni, 2018). In developing economies,
innovation consists of imitating products and processes designed elsewhere, mainly
Vivarelli (2014). Furthermore, essential firm characteristics such as size do not
appear to be a vital determinant of sales growth rate. Some research suggests a
small, negative relationship (Becchetti & Trovato, 2002; Bottazzi, Coad, Jacoby,
& Secchi, 2005). On the contrary, firm age has been found to affect sales growth
with younger firms featuring higher growth rates (Coad, Segarra, & Teruel, 2013),
or moderating the relationship between innovation and growth (Coad, Segarra, &
Teruel, 2016).
The innovation, strategy, and marketing research have examined the mechanisms
of the innovation-firm growth nexus investigating a variety of innovation types,
including inputs (internal and external R&D), outputs (product and process inno-
vation), and intermediate outputs (patents). Most scholars agree that R&D spending
leads to the introduction of new products (Cooper & Kleinschmidt, 1987; Krishnan
& Ulrich, 2001; Parisi, Schiantarelli, & Sembenelli, 2006) that in turn enables
firms to increase customer satisfaction (Johannessen, Olsen, & Lumpkin, 2001)
and gain market share early (Banbury & Mitchell, 1995). As a result, firms can
improve financial performance and grow faster. In contrast, process innovation is
more production-oriented compared to the sales or customer-oriented nature of
product innovation (Hervas-Oliver, Sempere-Ripoll, & Boronat-Moll, 2014). It is
mainly related to new processing machines or IT equipment (Edquist, 2001), and
it is predominantly focused on the reduction of production cost (Papinniemi, 1999)
and labor costs (Coad & Rao, 2011). Furthermore, process and product innovation
can be interrelated. For example, process innovation can increase product quality
(Damanpour, 1991). Finally, patented innovations may lead to increased profit
margins or sales (Brouwer & Kleinknecht, 1999) although mainly in conjunction
with other innovation mechanisms (Cohen, Nelson, & Walsh, 2000).
However, in general, empirical research exploring the relationship between
innovation and growth has had mixed results (Audretsch, Coad, & Segarra, 2014;
Coad, 2009). Some studies have found a positive relationship (e.g., Deeds, 2001;
Roper, 1997; Yasuda, 2005), others found no significant results (e.g., Bottazzi,
Dosi, Lippi, Pammolli, & Riccaboni, 2001; Geroski & Mazzucato, 2002; Lööf &
Heshmati, 2006), even for persistent innovators (Guarascioa & Tamagni, 2019),
while a few yielded negative results (e.g., Freel & Robson, 2004). Firm sales growth
rates appear to be unpredictable and random (Guarascioa & Tamagni, 2019), and the
explanatory power of innovation determinants is extremely weak (Geroski, 2000).
Innovation and Sales Growth Among Heterogeneous Albanian Firms: A. . . 149
Some scholars have been motivated by these inconsistent findings to use novel
statistical techniques such as quantile regression (QR) in an attempt to account for
the heterogeneous impact of innovation on firms’ sales growth (Coad & Rao, 2008;
Santi & Santoleri, 2017; Segarra & Teruel, 2014). Whether innovation is measured
as a composite index (Bianchini et al., 2018; Coad & Rao, 2008) or separate
indicators are used (Segarra & Teruel, 2014), the results suggest that innovation
is of significant importance for high-growth firms only.
This paper aims to test the innovation-firm growth relation in the context of a
developing economy, using a heterogeneous sample of firms operating in different
sectors based on the 2019 World Bank Group enterprise survey data. The study
focuses on how different firm-specific characteristics such as size, age, patenting,
internal and external R&D, product, and process innovation affect sales growth.
The paper is structured as follows: Section 2 presents data and the model
used. Section 3 contains linear and quantile regression analysis. Section 4 includes
discussions, implications at the policy level, and limitations.
2 Method and Data
2.1 Data
The survey data were obtained from the World Bank Group (WBG) enterprise
survey dataset, collected between January and May 2019. The final sample for this
research comprises 272 firms randomly selected using three levels of stratification:
industry, firm size, and region (World Bank Albania, 2019). All cases whose
responses were classified as accurate or somewhat accurate, and cases with missing
data, more than 20% have been removed from the sample.
2.2 Main Variables and Measurement
Sales growth (dependent). Following Bianchini et al. (2018), sales growth was
measured as the log-difference between the natural logarithm of sales for the 2018
fiscal year with the logarithm of sales for the previous year.
Independent variables. The independent variables in this study are (1) process
innovation, (2) product innovation, (3) external research and development (R&D),
(4) internal research in R&D, and ownership of patents. All these variables are
binary. Managers were asked whether any of the above has been introduced or used
by the firm during the last 3 years.
Control variables. Size (natural logarithm of the number of employees) and age
(natural logarithm and years since foundation) are the two controls in this study.
2.3 Model and Estimation
This study analysis starts by investigating the relationship between innovation and
sales growth using ordinary least square (OLS) regression. This analysis represents
the baseline. However, since OLS estimates are calculated based on the average
effect of the independent variables on the outcome, they provide an incomplete
picture. Given that sales growth distributions are fat-tailed and skewed, the results
will be biased also (Coad & Rao, 2008). Instead, the QR approach provides more
robust results when the error term is not normally distributed (Buchinsky, 1998).
Moreover, it allows us to identify potential asymmetric effects and variations in the
coefficient estimates of the high-growth firm (the top quantiles) vs. low-growth firms
(the bottom quantiles).
2.3.1 Correlations and Collinearity Statistics
Table 1 shows the correlations among the variables. The coefficients between some
of the independent variables are significant, as expected. However, the majority are
weak or moderate. No multicollinearity-related issues are found as the variance
inflation factor (VIF) values are well below the threshold of 5 (values are around 1).
3 Results
The results for OLS and QR estimation are reported in Tables 2 and 3. The OLS
results show that only process innovation has a significant effect on sales growth,
while the other variables do not.
In contrast to the baseline analysis, QR results, at all quantile levels, except for
the 90% quantile, are not significant (one exception for size at the 50% quantile,
although the results are not robust). At the 90% quantile, the coefficients of
innovation are first, much larger, and second, significant for the most part. Product
innovation and internal R&D have a positive effect on sales growth while process
innovation and external R&D, surprisingly, have a negative impact. The evidence
here suggests, therefore, that investments in innovation activities have a significant
contribution to the firm’s sales growth performance only for high-growth firms.
The analysis of the pseudo R2 results depicts an interesting picture. Innovation
measures account for around 6% only for slow-growth and high-growth firms.
For the other quantiles, pseudo R2 figures are around 1–2% suggesting a weaker
contribution of innovation in explaining growth performance. The pseudo R2
appears to be U-shaped when moving from lower to higher quantiles. However,
despite these nuances, data suggest that very little of the sales growth variance is
explained by innovation.
Table 1 Bivariate correlations
Variables Log diff. gr. Ln (size) Ln (age) Product innovation Process innovation Internal R&D External R&D Patents
Log diff. growth 1
Ln (size) .052 1
Ln (age) .080 .219** 1
Product inn. −.018 .065 −.077 1
Process inn. .131* .277** .070 .079 1
Internal R&D −.024 .020 −.027 .157** .019 1
External R&D −.015 .096 −.043 .119* .051 .368** 1
Patents .043 .118* −.006 .099 .229** .216** .248** 1
**p < 0. 01, *p < 0.05
Innovation and Sales Growth Among Heterogeneous Albanian Firms: A. . .
151
Table 2 OLS and QR estimation: the coefficient and standard error on innovation measures
reported for the full sample and 10, 25% quantiles
Full sample Q10 Q25
Variables Coef. S. E. Coef. S. E. Coef. S. E.
Ln (size) .111 .101 .072 .108 .022 .026
Ln (age) −.009 .041 .003 .276 −.009 .073
Product innovation −.019 .111 .050 .229 .021 .063
Process innovation .262** .129 .308 .224 .081 .059
R&D internal −.099 .162 −.407 .657 .040 .067
R&D external −.025 .301 −.631 .446 −.518 .512
Patents .089 .202 .168 .184 .032 .054
Constant −.413 .289 −.808 .925 −.180 .175
R2/pseudo R2 0.024 0.0527 0.0157
N. of observation 272 272 272
***p < 0. 01, **p < 0.05, *p < 0.1
Table 3 QR estimation: the coefficient and standard error on innovation measures reported for 50,
75, and 90% quantiles
Q50 Q75 Q90
Variables Coef. S. E. Coef. S. E. Coef. S. E.
Ln (size) .023* .009 .013 .014 .0324 .033
Ln (age) −.032 .036 −.053 .047 −.041 .065
Product innovation .011 .037 .0501 .041 .198 .088***
Process innovation .035 .029 .0192 .029 −.143 .053***
R&D internal .049 .044 .0357 .128 .213 .167*
R&D external .002 .181 −.073 .143 −.412 .184**
Patents −.040 .047 .010 .063 −.007 .172
Constant .056 .104 .283 .116 .383 .199
R2/pseudo R2 0.0133 0.0109 .0614
N. of observation 272 272 272
***p < 0. 01, **p < 0.05, *p < 0.1
Overall, the results show that the innovation measures that have a strong and
significant relationship with sales growth are product and process innovation. These
results are in line with Vivarelli (2014) discussion, who suggested that these types
of innovations are more suitable for firms operating in transition and developing
economies.
4 Discussion
Since the seminal work of Joseph Schumpeter (1934), innovation has been widely
recognized as a source of competitive advantage and growth for firms. However,
empirical research has struggled to confirm this theoretical axiom. As suggested

by Coad (2009), returns from innovation are highly uncertain because of firms’
heterogeneity. Besides, they are difficult to determine due to challenges in mea-
suring innovation. Additionally, standard regression analyses are inappropriate to
investigate innovation-sales growth relations since the distribution of the latter is
usually highly skewed. QR allows determining the effects of innovation measures
over the entire conditional growth rate distribution (ibid). This study aims to
analyze the innovation determinants of firm’s sales growth by accounting for the
heterogeneity using both OLS and QR.
First, the study results show that the strength of the causal link between inno-
vativeness and firm growth is overestimated by the theory, at least for developing
countries. These results do not come as a surprise considering the average low level
of innovativeness and expenditure in R&D in these countries. However, independent
from context, they are in line with other studies conducted in developed economies
(e.g., Coad, 2009; Geroski, 2000) or even middle-income countries (e.g., Santi &
Santoleri, 2017) that suggest that firms’ growth is very idiosyncratic.
Second, the QR analysis results show that innovation contributes to sales growth
only for fast-growth firms as suggested by other empirical studies (e.g., Coad &
Rao, 2008; Santi & Santoleri, 2017; Segarra & Teruel, 2014). More specifically,
product innovation and internal R&D have a positive effect on sales growth. The
result related to the negative impact of process innovation and external R&D comes
as a surprise although in line with other studies (e.g., Na & Kang, 2019). The
presence of lagged effects might be a possible explanation. Since this study is cross-
sectional and has not controlled for lagged growth, it is difficult to capture the effects
in time of different innovation activities. Future research needs to investigate this
relationship more in-depth.
Third, on a methodological note, OLS baseline analysis results and QR results
depict entirely different pictures of the innovation-sales growth relation. While OLS
regression results suggest that process innovation positively affects sales growth,
the QR results show that this effect is either non-significant or negative. It can be
argued that when dealing with highly skewed growth rates, it is necessary to use
more parsimonious regression techniques such as QR.
From a policy-making viewpoint, our results suggest that state-owned agencies
should promote innovation among firms with high-growth potential. This approach
is used by some donor development programs (e.g., some EU-funded programs)
that are already doing through competitive grants, technical support, and other
mechanisms. A one-size-fits-all solution does not produce the aimed results in terms
of growth and, consequently, employment.
Several limitations bound the study. First, external and internal R&D are
measured as binary variables since data on R&D expenditure are missing almost
completely. As suggested by Coad and Rao (2008), R&D expenditures, despite their
limitations, can capture better the phenomenon of firm-level innovation. Second,
this study is cross-sectional. Longitudinal data might shed some light on the effects
of the sequential adoption of innovation activities and their lagged impact. Finally,
this study focuses on the relationship of different measures of innovation on sales
growth, neglecting the compounding effect of different innovation activities (see

Bianchini et al., 2018; Coad et al., 2016). Future research can use composite
‘innovativeness’ indexes.
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Quantitative Analysis of Inequalities
at ICT Sector in Visegrad Countries
Tatiana Corejova, Roman Chinoracky, and Alexandra Valicova
Abstract The information and communication technology sector significantly

influences business models, companies or processes. It is an integral part of the
economy and a part of key innovations. It is also the essence and bearer of the great
economic paradoxes of today. Rapid advances in ICT create opportunities to gain
market advantage and evoke challenges in relation to consumption, distribution,
allocation of factors of production, evaluation of efficiency and effectiveness.
Inequalities between market players occur in each market and relate to the unequal
distribution of income, assets or access to scarce resources throughout society. In
the quantitative analysis of the ICT sector, we focus on economic disparities and
inequalities between different categories of business entities. To identify inequalities
in the ICT sector, the procedures used to quantify income inequalities are used. The
results of the study of the ICT sector in the V4 countries show significant differences
in the shares of individual size categories of companies in total turnover, total assets
and intangible fixed assets. This indicates inequalities, the magnitude of which is
reflected in both the Lorenz curves and the Gini coefficients. The results of research
in the V4 countries confirmed the dynamic changes in the level of concentration as
well as the reduction of inequalities between different size categories of companies
in the market.
Keywords Concentration · Gini coefficient · inequalities · ICT sector · Lorenz

curve · Visegrad countries
T. Corejova () · R. Chinoracky · A. Valicova

University of Zilina, Zilina, Slovakia
e-mail: tatiana.corejova@uniza.sk; roman.chinoracky@fpedas.uniza.sk;
alexandra.valicova@fpedas.uniza.sk
https://doi.org/10.1007/978-3-030-63970-9_12
158 T. Corejova et al.
1 Introduction
In each country, the ICT sector represents an important and strategically important
area for the state, companies, households and citizens-customers. The development
of ICT has a direct and fundamental impact on the development of the entire
infrastructure and economy of each country. ICTs are the driving force behind
the development of the economy and business. The ICT sector has continued to
experience enormous dynamic development worldwide in recent decades, which
has a significant impact on the development of the economy and society as a whole.
At present, the difficulties of the multifaceted and far-reaching changes in
the electronic communications sector that have triggered the transition from a
monopoly to a competitive environment still persist. In the area of services,
where voice services in fixed networks predominated, new services of fixed and
mobile networks dominate. Following the creation of a transparent competitive
environment, conditions have been created for new market entrants, stabilization and
gradual market growth. The current nature of communication platforms, especially
the Internet, opens the door to the integration of the world economy and brings
challenges and challenges for individual countries. An important and inseparable
attribute of the ICT sector’s offer is sufficiently secured data protection, fulfilling
the customer’s vision and helping to build trust in the new digital environment
(Chinoracky, 2019; Pólya et al., 2011).
The development of the ICT sector is reflected in new concepts such as the digital
economy. The digital economy as an umbrella term is used to describe markets
that focus on digital technologies. Typically, these are electronic transactions with
information goods and services. In the study “Harnessing the digital economy
for developing countries” (Dahlman, Mealy, & Wermelinger, 2016), the digital
economy is said to be a combination of several universal technologies and economic
and social activities carried out by people over the Internet and related technologies
(Ristvej, Lacinak, & Ondrejka, 2020). It includes the physical infrastructure on
which digital technologies are based, accessible devices, applications that use
accessible devices and the functions they provide.
The digital economy has permeated virtually all aspects of modern life, including
retail, transport, education, agriculture and benefits consumers, businesses and
governments (Dahlman et al., 2016). Tsyganov and Apalkova (2016) define the term
digital economy as a paradigm of the global information society. In general, it is a
model of post-industrial development of the world economy, which is based on the
use of technological platforms such as the Internet and other electronic devices and
the creation of a set of financial and economic relations in the system of production,
distribution, exchange and consumption of goods and services in world markets.
Production, manufacturing and services related to digital technologies fall under the
ICT sector. The ICT sector is the core of the digital sector (Bukht & Heeks, 2017).
The following sections are devoted to comparison of Visegrad countries or V4
that include The Czech Republic, Hungary, Poland and The Slovak Republic, by
the structure of ICT industry and level of inequalities among different size of
Quantitative Analysis of Inequalities at ICT Sector in Visegrad Countries 159
companies. The study builds on previous analysis (Corejová, 2013; Majercakova,

2014; Stofkova & Stofko, 2016) of the regional disparities as well as tendencies
of the ICT industry (Chatfield, Borsella, Mantovani, Porcari, & Stahl, 2017; Kim
& Kim, 2018). For the comparison of different countries conditions related to the
ICT sector, its conditions, consolidation and development, it is necessary to include
more characteristics or features (Madudova, Corejova, & Valica, 2018; Wannapan
& Chaiboonsri, 2018). So, this evoke the research questions: is it possible to use
the concept of evaluation of income inequalities for investigation of conditions at
the ICT market? How can we identify the differences? Can we use the methods of
concentration evaluation? And what indicators can we use? And can we identify the
trends and causes of the inequalities at the ICT market?
2 Theoretical Background
The issue of market inequalities, regional differences and regional development is a

frequently discussed topic today on a national and international scale (Hudec, 2007).
Various methods and procedures are used to understand and quantify inequalities
and regional differences. The reasons that cause inequalities between market players
and interregional differences are diverse and specific to a particular sector or region.
Inequalities between market players occur in each market and relate to the
unequal distribution of income, assets or access to scarce resources throughout
society. The share of large enterprises in the total volume of production, the size
of turnover, the range of assets and their individual types expresses the level of
concentration (Mas, Robledo, & Peréz, 2012; Šíbl et al., 2002). The Herfindal index
(HHI), the values of which belong to the interval (0, 1>), is most often used to
measure the concentration rate in a given industry.
Regional disparities express differences and inequalities in signs, phenom-
ena or processes. We define them as “a consequence of regional development,
when regional development in specific historical conditions can lead to uneven
development of regions, resulting in a number of inequalities: social, economic,
cultural, infrastructural, inequalities in living conditions, living standards, etc.,
which may lead to regional polarization (quantitative and qualitative)” (Kožiak,
2008). The geographical and social development of inequalities is a manifestation
of hierarchical organization (Lauko et al., 2014). Inequalities can be a source of
social and regional tension or can threaten the ecological balance and stability of
society. Viturka (2008) states that inequalities arise from the developmental and
hierarchical differentiation of social systems. Výrostová (2010) distinguishes three
types of regional disparities:
• economic disparities—relate to the difference in the quality and quantity of
regional output
• social disparities—relate to the income or standard of living of the population
• territorial disparities (physical disparities)—relate to geographical or natural
conditions
Due to research questions concerning the situation in the ICT sector in other
parts of the work, we will focus on economic disparities and inequalities between
different categories of business entities. To identify inequalities in the ICT sector,
we will use modified procedures used in the quantification of income inequalities,
namely the Lorenz curve and the Gini coefficient.
The Lorenz curve shows a standard uneven distribution of wealth in a population.
The perfect distribution of wealth in society means that there are no inequalities
and everyone has the same wealth. In this case, the curve is a straight line with
a 45◦ angle in the standard xy coordinate system. The absolute inequality in the
distribution of wealth, that is, wealth owned by one person in the whole society,
copies the axes of the graph. In reality, the Lorenz curve is in the range below the
45◦ curve and above the graph axes. The further the curve deviates from the line
of absolute equality, the greater the income inequality in society. The magnitude of
the deviation of the Lorenz curve from absolute equality expresses the degree of
inequality (Šíbl et al., 2002).
Gini’s coefficient reflects numerically the Lorenz curve. It is calculated as twice
the area between the ideal curve and the actual Lorenz curve. The coefficient takes
values in the interval < 0, 1>, i.e. from absolute equality to absolute inequality
(Byrtusova, 2015). The closer the index is to 1, the greater is the inequality in
society.
3 Data and Methodology
In identifying differences in the ICT sector within the V4 countries, we used the
international standard classification of economic activities (ISIC, 2008). It is used
to break down data that are linked to an economic entity as a statistical unit. It
is one of the tools used to implement various statistics such as outputs, inputs to
the production process, capital formation and financial transactions of economic
entities. Data from OECD, Finstat and Amadeus databases (Amadeus, 2020; Finstat,
2020; OECD, 2018, 2019) are used.
Business entities included in the assessment of inequalities and disparities in the
ICT sector in the V4 countries were divided into four size groups marked as follows:
small companies, medium companies, large companies and very large companies
(Amadeus, 2020; Finstat, 2020). The classification characteristic was the volume
of the company’s total assets. When calculating the sample of entities operating in
the ICT sector according to (Amadeus, 2020, Finstat, 2020), a confidence interval
of 95% and a maximum error margin of ±5% were required. The division of
companies into size groups in percentage terms is shown in Table 1.
The research objectives were focused on:
1. determining the degree of inequality in the ICT sector between four categories of
companies in each of the V4 countries
Table 1 Percentage representation of companies by size categories

Category of companies by size in % Czech Republic Slovakia Hungary Poland
All 100 100 100 100
Very large 3.72% 2.36% 3.50% 10.13%
Large 24.78% 20.35% 13.83% 23.45%
Medium 60.00% 64.90% 70.67% 61.16%
Small 11.50% 12.39% 11.25% 5.25%
2. quantification of the degree of inequality in the ICT sector in the V4 countries

3. identification of inequality rate trends
Within these objectives, we assume that there are significant inequalities between
individual categories of companies in the ICT sector in terms of their market shares
and that the most significant inequalities are reflected in intangible fixed assets. At
the same time, we start from the fact (Synek et al., 2003) that the advantages of large
companies in the ICT sector include capital strength, which leads to the possibility
of investing in intangible fixed assets and consequently to higher labour productivity.
We verify the research assumptions using the market concentration indicator and
by quantifying inequalities and disparities on the basis of three selected indicators,
namely:
• operating revenue or turnover in thousands AC include net sales, other operating
revenues and stock variations and do not include VAT
• total assets in thousands A
C
• intangible fixed assets in thousands A
C represent formation expenses, research
expenses, goodwill, development expenses and all other expenses with a long-
term effect
4 Results
Based on the available data, we processed the characteristics of the ICT sector
for four countries in the period of 2015–2018 in terms of the development of
inequalities between the four size categories of companies. Table 2 shows the market
concentration levels as assessed by the Herfindal Concentration Index (HHI). Data
on turnover, total assets and intangible assets were used to assess the level of
concentration. The results show that it is possible to use this index to evaluate the
concentration level. The index of shares in intangible fixed assets shows the highest
level of concentration in all countries although in the given period 2015–2018 the
level of concentration decreased with the exception of Hungary. According to the
indicators of companies’ shares in turnover, there was a slight increase in shares in
two countries and a decrease in two. However, there is no stable trend of reducing
the concentration of large and very large companies in the ICT market.
Table 2 Level of Indices 2015 2016 2017 2018

concentration (HHI) by
selected indices in V4 Czech Republic
countries in 2015–2018 Operating revenue 0.458 0.447 0.443 0.439
Total assets 0.586 0.520 0.530 0.545
Intangible fixed assets 0.745 0.687 0.669 0.698
Slovakia
Operating revenue 0.355 0.378 0.378 0.380
Total assets 0.338 0.355 0.350 0.356
Hungary
Total assets 0.542 0.536 0.522 0.540
Poland
Total assets 0.534 0.495 0.490 0.481
Table 3 Share of very large companies on the ICT market by selected indices in V4 countries in
2015–2018
Indices 2015 2016 2017 2018
Czech Republic
Operating revenue 61.15% 59.04% 58.45% 57.08%
Total assets 74.22% 68.23% 69.24% 70.63%
Intangible fixed assets 85.78% 81.88% 80.57% 82.50%
Slovakia
Total assets 35.88% 36.02% 38.40% 38.54%
Hungary
Total assets 70.84% 70.28% 68.99% 70.63%
Poland
Total assets 69.56% 65.86% 65.19% 64.24%
There are significant differences between the numbers of size categories of

companies (see Table 1). It can be assumed that it is important to examine
inequalities in the share of total turnover, total assets and intangible assets (Table 3).
To determine the level of inequality according to the three mentioned indicators,
we used the Lorenz curve. Figure 1 shows the inequalities in the intangible fixed
assets.
Fig. 1 Lorenz curves for intangible fixed assets
After determining the Lorenz curves, the Gini coefficients were calculated for all
indicators and countries (see Table 4). It is clear from the values of the coefficient
that in the course of 2015–2018, inequalities between the size categories of
companies in the ICT market decreased in all indicators, while the largest decrease
Table 4 Gini coefficients by Country Gini coefficient

selected indices in V4
countries in 2015–2018 2015 2016 2017 2018
By operating revenue (turnover)
CZ 0.742 0.587 0.586 0.583
SK 0.653 0.512 0.513 0.513
H 0.689 0.522 0.521 0.529
PL 0.773 0.568 0.563 0.566
By total assets
CZ 0.806 0.627 0.631 0.640
SK 0.611 0.456 0.463 0.469
H 0.502 0.621 0.615 0.625
PL 0.820 0.612 0.610 0.605
By intangible fixed assets
CZ 0.860 0.699 0.693 0.706
SK 0.918 0.697 0.629 0.708
H 0.770 0.652 0.630 0.627
PL 0.905 0.687 0.691 0.686
was recorded between 2015 and 2016. However, the values of the coefficient show
values above 0.4, which indicates inequalities in the distribution.
5 Discussion and Conclusion
The results of the study of the ICT sector in the V4 countries show significant
differences in the shares of individual size categories of companies in total turnover,
total assets and intangible fixed assets. This indicates inequalities, the magnitude
of which is reflected in both the Lorenz curves and the Gini coefficients. Between
2015 and 2018, we record a slight decrease in the level of concentration in the
Czech Republic and Poland (Table 2), while the highest decrease in concentration
is reflected in the indicator of intangible fixed assets, in Czech Republic by 0.047
points, in Poland even by 0.069. The highest decrease in the level of concentration
according to the share of intangible fixed assets was recorded in Slovakia even by
0.21 points. These values correspond to the conclusions of Ha Thi Thu Le, Quyen
Thi Mai Dao, Van-Chien Pham and Duong Thuy Tran (2019). The ICT sector has
an impact on technological innovation due to the types of innovation. Cooperation
with other companies has a positive impact on the creation of new ICT companies’
technological innovation (Kim & Kim, 2018). ICT companies such as start-ups
are perceived through innovation activity and also through the concept of open-
innovation. Use of the term “open innovation” has been promoted in particular by
Henry Chesbrough (2003, 2007; Delgado-Verde, Martín-de-Castro, & Navas, 2011).
The concept of open innovation is also associated with a change in the perception
of intellectual property and related rights (Chesbrough & Bogers, 2014).
The decrease in the Gini coefficient for intangible fixed assets ranged from 0.143
in Hungary to 0.245 in Poland. Overall, a decrease in the Gini coefficient was
recorded in all indicators, except Hungary in the case of total assets. The values
indicate a decrease in inequalities between individual size categories of companies
in the ICT sector. The highest decrease in inequalities was recorded in all indicators
between 2015 and 2016.
The main causes of changes in the ICT sector include differences resulting from
access to new forms of business models associated with start-ups, crowdsourcing
methods, changes in licensing options, speed of innovation and, above all, strength-
ening cooperation between different entities and network effects. However, there are
also reasons for the different degree of distribution of ownership of and access to
networks. These are linked to the market position of the incumbents and the ways
in which they are regulated.
The research assumptions were confirmed on the basis of the achieved results.
The ICT sector is developing dynamically in the V4 countries, which is reflected in
changes in the level of concentration and in the reduction of inequalities between
different size categories of companies in the market. Changes in the economy
associated with digitization and digital transformation, as well as lifestyle changes
with the widespread use of electronic devices, play an important role in reducing
inequalities in the ICT sector.
Acknowledgement This contribution was undertaken as a part of the research project 1/0152/18
VEGA Business models and platforms in the digital environment.
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7_14
Does Government Spending Cause
Investment?: A Panel Data Analysis
Nihal Bayraktar
Abstract Government spending has increased recently in almost all countries to

ease the severely negative economic impacts of the current health crisis. Similar
expansionary fiscal and monetary policies were observed during other economic
downturns too. The effectiveness of expansionary policies, especially in terms of
their effects on investment, has been discussed widely. Thanks to the possible
multiplier effect of higher government expenditures, it is expected that government
spending would generate a higher amount of income and therefore consumption in
economies. At some point, this higher government spending with glowing economic
activities is expected to increase private investment—an important item to promote
job creations and improvements in production. Although one of the direct or
indirect expected outcome of higher government spending is larger investment,
many empirical studies in the literature cannot observe this positive expected
effect of government spending on investment. As a result, even the necessity of
increased government expenditures during economic crisis has been questioned. In
this paper, the causal and correlation relationship between government spending and
investment is investigated in a panel data setting to better evaluate the importance
of higher government spending during economic downturns. The findings show
that country classifications based on income, time periods covered in the analysis,
measures of government spending and investment, and the time lag of government
policies can make a difference. There are cases where government spending highly
significantly causes private investment, and high correlations between two variables
are observed. Therefore, accurate evaluations of the impacts of government spend-
ing on investment may require detailed data analysis.
Keywords Government spending · Investment · Business cycles · Panel data ·

Causality · Correlation
N. Bayraktar ()
Penn State University—Harrisburg, Middletown, PA, USA
e-mail: nxb23@psu.edu
https://doi.org/10.1007/978-3-030-63970-9_13
170 N. Bayraktar
JEL codes: E2, E3, E6, H5
1 Introduction
Many countries have been dealing with one of the most serious economic crises
of our modern history. Economic activities are expected to decline globally due
to partial economic closings and lockdowns as a result of the covid-19 health
crisis. Some economists name this crisis as crisis by design because governments
deliberately fully or partially closed their economies to ease the pressure on the
health system. However, even without lockdowns, the spreading virus was going
to deteriorate labor force so badly that the economy was going to close at some
point anyway. Whether this crisis is named crisis by design or real crisis, the
response of governments has been similar as businesses have been temporarily or
permanently closed and unemployment rates have jumped. Almost all countries
announced expansionary monetary policies. Central banks cut their target interest
rates, increased loans to banks and businesses, and engaged in open market
operations. For example, the Federal Reserve System of the U.S. has announced
open-ended open market purchases and creating loans for the first time in its history
in March 2020. In many advanced and developing countries, expansionary monetary
policies have been accompanied by easy fiscal policies. Government spending
has jumped as new stimulus packages have been announced to help consumers,
unemployed people, and businesses. Tax collection deadlines have been extended,
and relaxed tax policies have been announced for closed businesses and unemployed
people.
Expansionary government policies are commonly used in many countries during
crisis to partially replace declining private consumption and private investment. The
logic behind this higher government spending is its multiplier effect. Governments
make more transfers and spend more money during crisis to create income for
some group of people and businesses. These people and businesses start spending
this additional income and generate even more income for some other groups of
people and businesses. Through this mechanism, government spending is expected
to generate higher incomes and private expenditures in the economic system.
As the economy expands with this stimulus from higher government spending,
total private investments start increasing at some points, as firms face with better
profit opportunities. Therefore, firms start to expand their businesses, open new
businesses, purchase more machines, equipment, and tools. This larger amount
of investment is expected to be the real push for economic expansion and then
lower unemployment rates through job creations. The link between unemployment
and investments is solid. Even if the economy starts to expand, it takes much
longer to lower unemployment rates because of cautious and hesitant actions of
businesses to undertake expensive investments before they are sure about their
profitability. Therefore, it is important to support higher investment by firms so
that they can produce more and create more jobs to lower unemployment. In this
Does Government Spending Cause Investment?: A Panel Data Analysis 171
regard, one of the roles of higher government spending, directly or indirectly,

is to promote investment to accomplish solid economic improvements and rising
economic prosperity with better job opportunities.
The issue in this story is that, in addition to these expected positive effects
of higher government expenditures on private consumption and investment, there
might be undesired negative effects too. Higher government spending means higher
government debt and larger government budget deficit. This may lead to higher
future taxes and interest rates, both of which can crowd out the private sector.
In this process, inflation can also be an issue. Additionally, as governments cut
back their spending to the reasonable levels over time, countries may face a new
set of economic crises with declining economic activities. Therefore, in order to
better evaluate the impact of higher government spending, we need to consider both
positive and negative effects to understand the net impact on economies. It should
be always remembered that higher government expenditures may not necessarily
benefit the economy all the time, and this may potentially lead to debt crisis, new
economic crisis, and inflation problems in the future.
Given the undeniable importance of higher total investment for improvements
in the economic activities and unemployment numbers, it is essential to understand
the nature of the role and the impact of government spending on private investment
and other major macroeconomic indicators during global crisis. In this paper, the
aim is to run some analysis to understand the causal and correlation relationship
between government spending and private investment in select high-, middle-, and
low-income countries between 1970 and 2018 as well as, more specifically, during
and after the 2008 global economic and financial crisis. The aim of the paper
is to evaluate how effective government spending is in terms of its impacts of
private investment in different economies, especially during economic downturns.
For such analysis, it is essential to consider both cross section and time dimensions.
Therefore, a panel dataset is used in analysis, and panel Granger causality tests are
calculated and compared across different time periods, definitions, time lags, and
country groups.
The findings show that country classifications based on income, time periods
covered in the analysis, measures of government spending and investment, and the
time lag of government policies make a difference in terms of the effectiveness
of government spending on private investment. There are cases where government
spending highly significantly causes private investment with high correlations.
Therefore, accurate evaluations of the impacts of government spending on invest-
ment may require detailed data analysis. The findings of the paper are also helpful to
evaluate the expected effects of higher government spending on investment during
the current global health and subsequent economic crisis.
172 N. Bayraktar
2 Effects of Government Spending and Literature Review
The expenditure definition of gross domestic production (GDP), a major measure

of economic development, consists of private consumption, private investment,
government spending, and net exports (i.e., exports minus imports):
GDP = Private consumption+Private investment+Government spending+net exports

(1)
On the one hand, in many advanced economies the share of private consumption
is the largest, while the share of private investment is relatively low. On the other
hand, in developing countries the share of private investment can be relatively higher
than what we observe in advanced economies.
Positive or negative impacts of government spending on private consumption and
private investment can be observed anytime, but this link gets even more important
during economic downturns and crisis. Governments start to follow expansionary
monetary and fiscal policies to stimulate weak economic conditions. As economies
start to experience problems, people tend to lose their jobs and incomes. At the same
time, businesses start to face a lower demand for their products and subsequent
lower profits. When a recession hits, two components of GDP, namely private
consumption and private investment, fall sharply. However, drops and fluctuations
in private investment are expected to be even deeper than the ones in consumption.
For example, private consumption in the United States, on the one hand, is expected
to drop by −4.2% in 2020 but rise by 3.7% in 2021 (EIU, May 2020 https://country.
eiu.com/united-states). Based on the same data source, private investment, on the
other hand, is forecasted to drop by −12% in the United States in 2020 and fall again
by −1.1% in 2021. Therefore, investment is more sensitive to declining economic
conditions, and it takes longer to recover it. This fact increases the importance of
rising investment for economic improvement.
During economic crisis periods, the main aim of expansionary government
policies, such as higher government spending, is to temporarily replace declining
private consumption and private investment to keep the level of GDP as high as
possible, as it can be seen in (1). With increasing consumer confidence, the first
component that is expected to start to rise is private consumption. Then increasing
private consumption improves demand conditions for businesses and their profit
expectations. As a result, firms start to invest more to open new businesses or expand
their businesses and create new jobs.
These expected positive results of higher government spending sound perfect
on paper, but these positive effects in reality depend on how responsive consumers
and firms are to changing government spending and how long it takes to see these
responses. The deeper the economic crisis, the longer it takes to see the positive
impacts of higher government spending on private consumption and investment.
The impact of government spending is measured by a multiplier which is a function
of marginal propensity to consume or save. For example, if consumers and firms

that collected government payments and transfers do not spend these funds but save
them instead, government spending cannot grow in multiple terms. If and only if
consumers and firms spend the income that they received from the government, it
would be a source of additional income for some other groups of people and firms.
As a result, with the help of this multiple-income creation process (i.e., a multiplier
higher than one), GDP can increase beyond the initial rise in government spending.
The other way of saying is that a unit increase in government spending can generate
more than one unit rise in GDP.
In addition to this positive effect of higher government spending, there are
also negative effects, named crowding-out effects of higher government spending.
Increasing government spending may use resources that are taken away from
the private sector. Larger budget deficits due to higher government spending can
increase government debt. In order to finance these larger deficits, governments need
to borrow more and more funds in financial markets. This process makes less funds
available for the private sector and then increases interest rates with an increasing
demand for funds by governments. Because it is not easy for the private sector to
compete with governments that are mostly considered to have lower risks, firms’
cost of borrowing rises considerably with increasing interest rates. As a result, firms
are expected to cut their investments or stop making investments altogether. The
declining share of private investment in GDP may also lower the level of GDP.
Therefore, the net effect of higher government spending on investment would be
much lower than expected when the negative crowding-out effect is added to the
positive multiplier effect.
Another set of negative effects of higher government spending on the private
sector is related to again increasing budget deficits, caused not only by increasing
government spending but also by declining tax revenues or tax adjustments for a
quicker economic recovery. For example, given the suddenness of the shocks, as a
response to the declining economy due to the health crisis and subsequent economic
lockdowns, deficits are getting larger with extremely large stimulus packages and
dropping tax revenues. Governments must finance the deficits with a large amount
of new government debts. Much higher public debt mean that governments may
need more resources to pay them back, such as much higher taxes in the future.
Therefore, higher expected taxes can put additional pressure on firms and lower
their investments. This can be an additional source of negative effects of higher
government expenses.
Rising expected inflation rates due to large budget deficits can be another source
of problems which would affect firms and their investments in a negative way. In
many countries where governments’ borrowing capacity can be lower for some
reasons such as high risks, they may need to print money to close their deficits.
This additional money in the system, combined with higher demand for goods and
services, can create perfect conditions for increasing prices and inflation. Right
now, economists do not have immediate concerns about higher inflation because
there are more serious problems at this stage, such as sharply declining GDP
and rapidly climbing unemployment rates, which have not been seen in decades.
174 N. Bayraktar
However, ultimately when the time arrives to pay back government debts and to
close government deficits, inflation issues will be discussed more. Firms are already
aware of this possibility, and this may delay their current investment decisions—a
single most important item to create jobs and increase GDP. Therefore, some people
fear that the current economic downturn may lead to back-to-back crisis: debt and
inflation crisis may follow the current economic and financial crisis. Therefore, it is
critical to closely watch the price stability to evaluate the possibility of additional
crisis (Mackintosh, 2020).
This discussion shows that there is no clear answer on whether higher gov-
ernment spending is beneficial for highly anticipated improvements in private
investments. Although there are other studies focusing on the effects of government
spending on investment in the literature, there is no clear consensus on theorical
and empirical impacts of government expenditures on private investment. Given the
importance of understanding the responsiveness of investment to changing levels
of government spending during crisis periods, the aim of this paper is to study the
causal link between two variables in a panel data setting under different definitions
of variables, time periods, time lags, and country groups. This systematic analysis
would be the contribution of this paper to the literature, as many empirical studies
claim that the impact of government spending on private investment is negative, and
a few show a positive link (see Şen and Kaya (2014) for a detailed literature review).
Some related studies are as follows.
Furceri and Sousa (2011) investigate the impact of government spending on
private consumption and investment. They use a panel sample of 145 countries
from 1960 to 2007. Their findings indicate that there are important crowding-out
effects, and government spending negatively affect both private consumption and
investment. Similarly, Afonso and Jalles (2015) investigate the relevance of fiscal
items for private and public investments. They use a panel dataset of 95 developed
and developing countries for the period of 1970–2008. They find a negative effect
of government expenditure on private investment; only government health spending
has a positive and significant impact on private investment.
In the literature, there are also empirical studies focusing on specific country
groups. Alesina, Ardagna, Perotti, and Schiantarelli (2002) investigate a panel
of OECD countries and want to understand the nature of the effects of fiscal
policy on investment. Their empirical outcomes show a large negative effect of
public spending on business investment. Laopodis (2001) focuses on Greece,
Ireland, Portugal, and Spain, and investigate the impacts of military and non-
military public expenditures on gross private investment by using cointegration and
error-correction analysis. The findings show that in some cases public spending
stimulates investment. Afonso and Sousa (2009) show that government spending
negatively affects private investment in the USA, the UK, Germany, and Italy.
Similarly, Afonso and Sousa (2011) show that government spending crowds-out
private investment by using a time-series data for Portugal for the period of 1979–
2007. Barro and Redlick (2011) cannot find any clear evidence of a multiplier effect
in the USA, including the impact on private investment.
In the literature, not all studies support the negative link between government
expenses and private investment. Positive effects of government spending on private
investment can be observed in some countries, but they are mostly conditional
on definitions and components of government spending. For example, Bayraktar
and Moreno-Dodson (2015) show that the impact of government spending can
be positive, given that expenses are productive. Their dataset covers eight fast-
growing developing countries and eight random developing countries. Similarly,
Bayraktar and Fofack (2011) show that government capital spending, but not
total government spending, has a positive effect on private capital accumulation
in sub-Saharan countries. Bayraktar and Fofack (2018) present the importance of
government spending on education investment and growth. Bayraktar and Moreno-
Dodson (2018) study the importance of government expenses for economic growth
and investment in sub-Saharan Africa. Şen and Kaya (2014) analyze empirically
the impacts of government spending on private investment in Turkey for the
period of 1975–2011. Their findings indicate that government current spending and
interest payments negatively affect private investment, whereas government capital
spending has a positive impact on investment.
The contribution of my paper to these earlier studies will be that my dataset
will cover earlier years as well as the years after 2008, corresponding to one of the
deepest global economic crises. It is important to analyze these years because it
can be seen clearer how government spending can determine investment during a
global crisis period. The analysis of these years can give better idea on what should
be expected with current higher government expenses. Also, another contribution
of my paper to this literature is that the main interest will be the identification of
the possible causal relationship between government spending and investment in
different country groups based on their income levels. A larger number of countries
are included in my dataset. An additional contribution of my paper is that most
empirical studies take expenditure and investment data in percent of GDP in their
analysis. However, with business cycle fluctuations, GDP as well as investment and
government spending may all change at similar amounts. In this case, it may not be
easy to capture the impacts of fluctuations in these variables when they are reported
in percent of GDP. Therefore, growth rates of investment and government spending
are calculated and used in my analyses, in addition to the definitions in percent of
GDP, to better evaluate the possible impacts of fluctuations in government spending,
especially during crisis periods.
3 Data Information
The analysis presented below uses mainly two variables taken from the World
Bank’s World Development Indicators and the IMF’s World Economic Outlook.
The dataset covers 30 low-income countries, 59 middle-income countries, and 39
high-income countries. The list of countries is presented in the Appendix table. The
period covers 1970–2018.
176 N. Bayraktar
1. Gross capital formation by the private sector consists of outlays on additions to

the fixed assets of the economy plus net changes in the level of inventories. Fixed
assets include land improvements (fences, ditches, drains, and so on); plant,
machinery, and equipment purchases; and the construction of roads, railways,
and the like, including schools, offices, hospitals, private residential dwellings,
and commercial and industrial buildings. Inventories are stocks of goods held by
firms to meet temporary or unexpected fluctuations in production or sales, and
“work in progress.” It is in constant 2010 local currency units and also in percent
of GDP.
2. General government expenditure includes all government current and capital
expenditures for purchases of goods and services (including compensation of
employees). It is in constant 2010 local currency units and also in percent of
GDP.
The government spending and investment series in growth rates and in percent
of GDP are presented in Fig. 1. As explained in the literature review above, most
empirical studies on the impact of government spending on investment introduce
these variables in their analysis in percent of GDP. The left-hand-side panels of
Fig. 1 show the variables in percent of GDP. The differences across country groups
are clear. The middle-income group has the highest share of investment in GDP. It
fluctuates around economic cycles, but it has an increasing trend between 1970 and
2018. The high-income group had the second highest level of investment in percent
of GDP until 2008. Throughout the years, it fell from around 28% on average
in 1970 to 22% in 2018. The average value of investment in percent of GDP in
low-income countries was the lowest one for many years, when compared to other
country groups. Although the series in the low-income group fluctuates the most,
it has a clear upward trend. It increased from 13% to nearly 25% of GDP between
1970 and 2018 and has passed the share of investment in the high-income group
since 2008.
The lower panel on the left-hand side of Fig. 1 presents government spending in
percent of GDP across different income groups. The following trends are observed.
The high-income group clearly has the highest share of government spending in
percent of GDP. While the share in the middle-income countries has been increasing
throughout the years, the series for the low-income group presents sharp fluctuations
from 1 year to another between 1970 and 2018.
The right-hand-side panel in Fig. 1 shows the same series in growth rates
instead. These growth rates are calculated based on the series in constant 2010 local
currency units. These alternative measures in growth rates can capture fluctuations
in government spending and investment better than the measures in percent of
GDP. The reason is that as GDP fluctuates, the ratios of government spending
and investment to GDP change as well—even if their levels are stable. Therefore,
real growth rates of these two variables can give a better view of what changes
are actually observed in them. When the series in percent of GDP on the left
are compared to the series in growth rates on the right, it can be seen how sharp
fluctuations in these variables are in growth rates. With the measures in percent of
GDP, these fluctuations are mostly disguised by fluctuating GDP, as can be seen
Private investment (% of GDP) Private investment (annual % growth)

35 30
30 25
20
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20 10
15 5
10 0
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Low income Middle income High income Low income Middle income High income
Government spending (% of GDP) Government spending (annual % growth)

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13 0
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Low income Middle income High income Low income Middle income High income
Fig. 1 Government spending and private investment. Source The author’s calculations based on
World Development Indicators and World Economic Outlook
how smooth series are on the left-hand side of Fig. 1. For each income group,
the fluctuations are strong, but they are the sharpest for the low-income countries.
For the high-income group, variations are relatively modest. These fluctuations
in the growth rates show that if the analyses are based only on the variables in
percent of GDP, a significant amount of information would be lost. Similarly,
studies taking the averages over time to smooth the series also eliminate valuable
shorter-term information. Another observation from Fig. 1 is that the government
spending and investment series are fairly different across country income groups.
Therefore, empirical studies combining countries from different income groups or
focusing on only one income group may ignore important information that can
be gained by comparison of groups. While changes in government spending may
not have an important effect on investment in some countries, it can be more
significant for a different group of countries and for different periods. Therefore,
conclusions on the effectiveness of government spending for investment may require
considerations of short-term fluctuations, country income groups, and different
measures of government spending and investment, as well as different time periods.
4 Panel Causality Analysis
There are many empirical studies indicating that government spending cannot
determine investment. The purpose of this section is to show that actually this link
between government spending and investment depends on which measures are used
178 N. Bayraktar
Table 1 Correlation coefficients

(growth
rate in
constant
(in % of GDP) LCU)
G(−1) and G(−2) and G(−1) and G(−2) and
G and INV INV INV G and INV INV INV
1970–2018
Low income 0.178** 0.121* −0.027 0.255*** 0.187* * −0.050
Middle income 0.131* 0.151* 0.022 0.452*** 0.408* ** −0.029
High income −0.54*** 0.100 −0.231*** −0.341*** 0.007 −0.033
2008–2018
Low income 0.24*** 0.718*** 0.251*** 0.141* 0.671*** −0.090
Middle income −0.855*** −0.607*** −0.578*** −0.524*** 0.324*** 0.081
High income −0.831*** −0.333*** −0.407*** −0.732*** −0.198** 0.459***
Note: G stands for governments pending and INV stands for private investment. (−1) stands for a
variable lagged one period sand (−2) stands for a variable lagged two periods.*, **,*** stand for
the level of significance at 10%, 5%, and 1%, successively
(in percent of GDP or growth rates), how countries are classified (low-, middle-,
and high-income groups), which time lags are used (impact of one-period and two-
period lags of government spending on investment), and which time periods are
analyzed (between 1970 and 2018 versus during and after the 2008 global economic
crisis).
The analysis in this section is based on Granger causality tests for panel datasets
for the classifications listed above. The aim is to understand whether government
spending actually causes private spending in different income groups, in different
periods, and using different measure of government spending and investment. This
causality analysis can be extended to regression analysis in the future to better
evaluate the impact of government spending on private investment.
Before the causality test results are presented, the correlation coefficients
between government spending and investment are presented in Table 1 to give initial
idea on the nature of the relationship between two variables. While calculating
these correlation coefficients, different lagged values of government spending are
introduced to understand whether it takes time for government spending to be linked
with investment. Investment is the component of GDP with largest fluctuations,
especially during economic downturns. Therefore, it takes time to improve this item
because firms can be hesitant to undertake expensive investments until they are more
confident about expected returns from investments and wait until expected returns
can cover high costs of investment. Therefore, the impact of government spending
on investment may take a couple years, as well as some immediate impacts.
As can be seen in Table 1, most correlation coefficients are significant at the 1%
significance level because of large numbers of observations in each group. While,
in the first panel of the table, the government spending and investment series are
presented in percent of GDP, they are in growth rates of real values in the last
columns of the table. One common observation from the table is that the correlation
coefficients are much higher on the right side, indicating that the growth rates instead
of measures in percent of GDP can capture fluctuations and therefore correlations
better. The focus is on two time periods. One period is between 1970 and 2018.
It covers almost 50 years, and many recession and economic improvements are
observed during this period. When the time period is long, estimate coefficients and
correlation calculations will be based on averages across many years. Thus, we may
lose significant information in this process because the link between government
spending and investment may be more important in shorter time periods, especially
during economic crisis. Therefore, the analysis is repeated for the years specifically
corresponding to an economic downturn period (the 2008 global economic crisis)
to observe changes in the relationship between government expenditure and private
investment.
When we check the results for the 1970–2018 period with the measures in percent
of GDP in Table 1, it can be seen that the correlation between government spending
(G%GDP) and investment (INV%GDP) is positive and weakly statistically signifi-
cant for the low- and middle-income groups. This is true for the correlations between
the same period variables as well as between the current value of INV%GDP and
the lagged-one-period value of G%GDP. On the other hand, the correlation between
G%GDP and INV%GDP is negative and highly significant for the high-income
group. This is the negative link between government spending and investment
observed in many other empirical studies. In high-income countries, governments
generally start spending more money when the economy is not doing well, and
consumption and investment are declining. Given the continuous importance of
government spending on average in economies of the low- and middle-income
groups, we do not observe this negative link between G and INV for these groups
of countries. No significant correlation is observed between the one-period lagged
value of G%GDP and the current value of INV%GDP in the high-income group. We
observe similar correlations when the growth rates are used instead of the measures
in percent of GDP.
When the focus is on the period corresponding to the years after the 2018 global
crisis, the correlation between government expenses and investment becomes fairly
higher than the ones calculated by using observations from 50 years. Almost all
correlations are statistically significant. For low-income countries, the correlation
coefficients are positive and highly significant. This positive link indicates gov-
ernment spending is important for these countries’ investment and development.
On the other hand, for middle-income and high-income countries the correlation
coefficients are significantly negative for each correlation calculated with the
measures in percent of GDP. Interestingly, for the same groups of countries, the
correlation coefficient gets positive and significant when we consider the link
between the lagged values of the growth rate of government spending and the current
value of the growth rate of investment. Based on this result, it takes 2 years to see
the positive effect of government spending on investment in high-income countries,
while it takes 1 year to see this positive impact in the middle- and low-income
countries. These positive correlations are observed may be because fluctuations are
180 N. Bayraktar
better captured by the growth rates instead of the measures in percent of GDP; we
cannot see these positive effects with the measures in percent of GDP. The additional
point is that in panel data settings the impact of government spending can be better
evaluated when the focus is on periods where many countries have been affected
at the same time, instead of focusing on a very long time period to see the link.
Government spending can be more important for private spending during deeper
economic crisis periods and when the impact is global. This can be one explanation
why we observe higher correlations when the time period is shorter.
After the analysis of the correlation coefficients, we can focus on the causal
link between government spending and investment. To check whether any dual
causality relationship is observed, a set of pairwise Granger panel causality tests are
preformed (Granger, 1969). Table 2 reports the results for low-income countries. In
the causality analysis, similar to the correlation calculations in Table 1, alternative
measures of government spending and investment (in percent of GDP or in growth
rates), alternative time periods (1970–2018 versus 2008–2018), and different lags
are used. Because the impact of government spending on private investment is
expected to be seen in a couple of years, causality tests are calculated with 1
lag, 2 lags, and 3 lags. The test results are systematically more significant when
government spending and investment is measured in growth rates in the low-income
group. For this set of countries, the causality moves from government spending
toward private investment. The causality hypotheses moving from investment to
government spending are all rejected, meaning that no causality is observed moving
from investment to government spending for low-income countries. The strongest
causality is observed with one lag, but the causality tests with two lags also give
significant results. When we use the causality link between the growth rates of the
variables, the causality test results are significant with three lags, indicating that
government spending causes private investment.
Table 3 shows the same set of causality test results for the middle-income group.
In almost each test, government spending causes investment at high significance
levels. The correlations between the variables were also high for these countries as
reported in Table 1. For the middle-income group, we observe several examples of
dual causality, meaning that government spending causes investment and, at the
same time, investment causes government spending. The dual causality is more
apparent for the period after 2008 and when the variables are measured in percent of
GDP. This dual causality may lead to an endogeneity problem in regression analysis.
On the other hand, when the variables are measured in real growth rates, we do not
see a dual causality issue except one test result. The other interesting observation
in middle-income countries is that the causality effect of government spending on
investment is strongest with two lags, while the causality effect is weakest with three
lags.
In Table 4, the causality test results for high-income countries are reported. Many
empirical studies for this group of countries fail to find any significant impact of
government spending on investment. The findings indicate that, if any casualty
exists, it moves from government spending toward investment, not the other way
around, for this set of countries. For the 1970–2018 period and with the measures
Table 2 Low-income countries: pairwise Granger panel causality tests
G and INV (in % of GDP) G and INV (growth rate in constant LCU)
Null Hypothesis (H0 ) Test result F-statistic p-value of F-statistic Test result F-statistic p-value of F-statistic
1970–2018
Lag = 1
G does not Granger cause INV Reject H0 3.216 0.007*** Reject H0 4.112 0.001***
INV does not Granger cause G Fail to reject H0 0.982 0.523 Fail to reject H0 1.611 0.114
Lag = 2
G does not Granger cause INV Reject H0 2.257 0.022** Reject H0 3.611 0.005***
Lag = 3
G does not Granger cause INV Fail to reject H0 1.511 0.191 Reject H0 2.123 0.032* *
2008–2018
Lag = 1
INV does not Granger cause G Fail to reject H0 1.782 0.071* Fail to reject H0 1.482 0.201
Lag = 2
G does not Granger cause INV Reject H0 1.757 0.082* Reject H0 4.127 0.001***
Lag = 3
G does not Granger cause INV Fail to reject H0 1.413 0.232 Reject H0 1.726 0.082*
Does Government Spending Cause Investment?: A Panel Data Analysis
Note: Only low-income countries are included in the analysis. There are 30 countries and the time period is 1970–2018. The list of countries is given
in the Appendix. The panel dataset is unbalanced. The causality test is the one named Granger panel data test. The null hypothesis of the causality tests
are given in ne first column. The dependent variables of the causality regressions are given in bold in the null hypothesis. In the first panel, G and INV
are measured in % of GDP, and in the second panel G and INV are measured as growth rates of these variables in constant LCU. The test results are
presented in the second and fifth columns. The test statistics and their p-values are reported in the columns number 3, 4, 6 and 7. For each test, we reject
the null hypothesis if the p-value of the test is less than alpha, meaning that we observe Granger causality moving from X to Y (X Granger Causes Y)
with 1-alpha probability. If we fail to reject the null hypothesis (the p-value of the test is higher than alpha), it means that this test does not confirm any
181
causally issue moving from X to Y (X does not Granger Cause Y). The definitions of the abbreviations are as follow: G stands for government spending
and INV stands for private investment. *, **, and *** stand for significance levels of 10%, 5%, and 1%, successively
Table 3 Middle-income countries: pairwise Granger panel causality tests
Gand INV (in % of GDP) G and INV (growth rate in constant LCU)
182
1970–2018
Lag = 1
G does not Granger cause INV Reject H0 1.961 0.052* Reject H0 2.080 0.042**
INV does not Granger cause G Fail to reject H0 1340 0.313 Fail to reject H0 1.411 0.233
Lag = 2
G does not Granger cause INV Reject H0 1.861 0.06* Reject H0 4.132 0.001* **
INV does not Granger cause G Fail to reject H0 1.511 0.191 Reject H0 1714 0.09*
Lag = 3
2008–2018
Lag = 1
G does not Granger cause INV Reject H0 3.134 0.007* ** Reject H0 3.563 0.005* **
INV does not Granger cause G Reject H0 2.153 0.03** Fail to reject H0 1.021 0.501
Lag = 2
G does not Granger cause INV Reject H0 4.134 0.001* ** Reject H0 3.987 0002* **
INV does not Granger cause G Reject H0 1781 0.07* Fail to reject H0 1.342 0.311
Lag = 3
G does not Granger cause INV Reject H0 1.699 0.091* Fail to reject H0 1511 0.191
INV does not Granger cause G Reject H0 1.891 0.062* Fail to reject H0 1.311 0.331
Note: My middle-income countries are included in the analysis. There are 59 countries and the time period is 1970–2018. The list of countries is given in the
Appendix. The panel dataset is unbalanced. The causality test is the one named Granger panel data test. The null hypothesis of the causality tests are given in
the first column. The dependent variables of the causality regressions are given in bold in the null hypothesis. In the first panel, G and INV are measured in
% of GDP, and in the second panel, G and INV are measured as growth rates of these variables in constant LCU. The test results are presented in the second
and fifth columns. The test statistics and their p-values are reported in the columns number 3, 4, 6 and 7. For each test, we reject the null hypothesis if the
p-value of the test is less than alpha, meaning that we observe Granger causality moving from X to Y (X Granger Causes Y) with 1-alpha probability. If we
fail to reject the null hypothesis (the p-value of the test is higher than alpha), it means that this test does not confirm any causality issue moving from X to Y
N. Bayraktar
(X does not Granger Cause Y). The definitions of the abbreviations are as follow: G stands for government spending and INV stands for private investment.
*, **, and *** stand for significance levels of 10%, 5%, and 1% successively
Table 4 High-income countries: pairwise Granger panel causality tests
G and INV(in %of GDP) G and INV (growth rate in constant LCU)
1970–2018
Lag = 1
Lag = 2
Lag = 3
G does not Granger cause INV Reject H0 1.713 0.09* Fail to reject H0 1.613 0.112
2008–2018
Lag = 1
Lag = 2
G does not Granger cause INV Reject H0 1.976 0.051* Reject H0 3.751 0.003***
Lag = 3
G does not Granger cause INV Reject H0 1.741 0.08* Reject H0 2.011 0.04**
Does Government Spending Cause Investment?: A Panel Data Analysis
Note: Only high-income countries are included in the analysis. There are 39 countries and the time period is 1970–2018. The list of countries is given in the
Appendix. The panel dataset is unbalanced. The causality test is the one named Granger panel data test. The null hypothesis of the causality tests are given in
the first column. The dependent variables of the causality regressions are given in bold in the null hypothesis. In the first panel, G and INV are measured in
% of GFP, and in the second panel, G and INV are measured as growth rates of these variables in constant LCU. The test results are presented in the second
and fifth columns. The test statistics and their p-values are reported in the columns number 3, 4, 6 and 7. For each test, we reject the null hypothesis if the
p-value of the test is less than alpha, meaning that we observe Granger causality moving form X to Y (X Granger Causes Y) with 1-alpha probability. If we
fail to reject the null hypothesis (the p-value of the test is higher than alpha), it means that this test does not confirm any causality issue moving from X to Y
183
(X does not Granger Cause Y). The definitions of the abbreviations are as follow: G stands for government spending and INV stands for private investment.
*, **, and *** stand for significance levels of 10%, 5%, and 1%, successively
184 N. Bayraktar
in percent of GDP, we do not observe any causality moving from government

spending toward investment except with three lags. On the other hand, we observe
government spending causes investment with one lag and two lags when the
variables are measured in real growth rates. The growth rate measures can capture
the fluctuations better, therefore it might be easier to see a causal relationship. It
is a totally different story when the focus is on the period during and after the
global crisis of 2008. In each lag specifications and measurements of government
spending and investments, government spending Granger causes investments. When
government expenses are most needed (i.e., during global financial downturns), the
importance of government spending and its causal links toward investments become
more significant. Similar to the analysis with the larger period, we do not observe
any causality moving from private investment toward government spending in the
high-income group.
Overall, the link between government spending and investment depends on many
factors even in the simplest sets of analysis. The causality and correlation results
change from one group of countries to the other; from one measure of government
spending to the other; and from one time period to another (existence of global
crisis and the depth of crisis can make a difference). The link will also depend on
the time lags. Therefore, the link between government spending and investment is
too complex to make general conclusions with one-dimensional analysis.
5 Conclusions and Policy Recommendations
One of the biggest roles during economic crisis is played by governments, and they
generally start to follow easy fiscal and monetary policies. A typical prescription
advises them to spend more money, lower taxes, and increase money supply.
Especially, during severe and unexpected economic crisis, as it is happening during
the current health crisis, it gets extremely difficult to follow targeted spending. Given
the emergency of the situation, governments may end up spending huge amount of
money without carefully considering where it goes and what might be the ultimate
impact. However, this study shows that the high multiplier effect is possible, and
still government spending can improve consumption, production, and ultimately
investment in most cases with or without time lags. While evaluating the effect
of government spending, we should consider the income level of countries, how to
measure the variables, which periods are analyzed and how long it may take to see
the impacts. Given the basic results presented in this paper, it is not totally accurate
to identify government spending as insignificant for private investment. The answer
depends, and the link might be stronger during severe crisis.
The study in the future can be extended to consider how regression results
may change based on classifications used in this paper and by taking into account
different sets of control variables to better understand whether public spending is
really significant for private investment.
A.1 Appendix: List of Countries
Low income Middle income High income

Afghanistan Albania Jordan Australia Singapore
Benin Algeria Kenya Austria Slovak Republic
Burkina Faso Angola Malaysia Belgium Slovenia
Burundi Argentina Mauritania Canada Spain
Central Afr. Rep. Armenia Mexico Chile Sweden
Chad Azerbaijan Moldova Croatia Switzer land
Congo, Dem. Rep Bangladesh Morocco Cyprus United Kingdom
Eritrea Bolivia Myanmar Czech Rep. United States
Ethiopia Botswana Namibia Denmark Uruguay
Gambia Brazil Nicaragua Estonia
Guinea Bulgaria Nigeria Finland
Guinea-Bissau Cabo Verde Pakistan France
Haiti Cambodia Paraguay Germany
Liberia Cameroon Peru Greece
Madagascar China Philippines Hungary
Malawi Colombia Romania Iceland
Mali Comoros Russia Ireland
Mozambique Congo, Rep. Senegal Israel
Nepal Costa Rica South Africa Italy
Niger Cote d’Ivoire Sri Lanka Japan
Rwanda Dominican Rep. Sudan Korea, South
Sierra Leone Ecuador Thailand Kuwait
Somalia Egypt Tunisia Latvia
South Sudan El Salvador Turkey Lithuania
Syria Equatorial Guinea Ukraine Netherlands
Tajikistan Fiji Uzbekistan New Zealand
Tanzania Gabon Vietnam Norway
Togo Georgia Zambia Panama
Uganda India Zimbabwe Poland
Yemen Indonesia Portugal
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An Exploratory Study of Fans’
Motivation in Albanian Football
Championship
Julian Bundo and Mirdaim Axhami
Abstract Football continues to excite and attract more and more people to most
countries. This phenomenon that is now bypassing all the borders of the world has
been starting up in Albania in the last few years. As one of the most attractive
sports which have long roots in Albanian history, football is trying to give important
signals, both in terms of the game and for the participation of the fans attending
the events in the stadium. Based on the overview of the football championship,
we verified that more and more fans particularly female and youngest people are
heading to the stadiums to enjoy the football game. With the beginning of the
twenty-first century, FIFA and EUFA have changed their program, giving particular
importance to increase participation in football activities regardless of gender and
age. Even football fans like in other sports are influenced by their motivation which
leads them to behave or act in different ways. Precisely, the study aims to examine
football fans’ motivation factors of attendance using a nation-wide representative
sample (N = 768). Using exploratory factor analysis, a group of motivation
factors is analyzed, testing constructs that explain attendance. The study identifies
three main factors affecting attendance of Albanian football fans, considered as
entertainment, tradition, and group involvement. Entertainment is identified as the
most important factor. MANOVA was later used to identify differences in motivation
factors between age groups and participation in an organized fan group (support
group/ultras).
Keywords Motivational factors · Football fan attendance · Albania

championship
J. Bundo () · M. Axhami

Faculty of Economy, Department of Marketing and Tourism, University of Tirana, Tirana, Albania
https://doi.org/10.1007/978-3-030-63970-9_14
188 J. Bundo and M. Axhami
1 Introduction
In the last decade of the twentieth century, the first changes for football clubs in
terms of marketing took place, implementing their marketing plans and strategies,
thus developing programs that would increase the value of their offer for satisfy
their own fans and attracting new ones (Beccarini & Ferrand, 2007). In this context,
the sport marketing industry has been grown significantly, and from year to year her
image around the world has created all the ingredients to increase the participation
for the new generation on these events (Ramadhan, Ramadhan, Yusuf, Yahya, &
Febriani, 2019).
Very quickly the football marketers began to apply Kotler principles; according
to him “achieving organizational objective depends on determining the needs and
wants for target market, and delivering all the satisfactions and desired more
efficiently and effectively than competitors do” (Beccarini & Ferrand, 2007).
These changes created all the possibilities until football marketers understood the
relationship that football fans are looking for by offering them the right stimuli
from the event’s experience (Draper, 2002, p. 13). According to Know and Trail
(2001) fan motivation is therefore defined as a set of attitudes and purchases toward
players and teams. The importance that football has ensured in the various countries
of the world by motivating more and more people has not left indifferent even the
fans of this sport in Albania. As the most aimed sport, football takes place every
year in Albania organized in two competitions: National and European football
Championships.
In the National Football Championship, “Kategoria Superiore” is the elite
division, composed from 10 clubs, with 36 matches in total (teams meet each other
four times during the season, in four stages). In Albanian Cup, football clubs from
every division are involved, in a play-off type of competition. Both competitions
start at the beginning of September till on the last week of May, with different
agenda and organization. According to UEFA Country Ranking Albania is placed on
the 36th position among 55 countries. In addition to internal competitions, there are
two more competitions organized annually by UEFA (Union of European Football
Associations), which are as follows:
All the best teams from each European country are involved in these competi-
tions. The winner clubs of UCL automatically participate on the competitions for
the International Cup for clubs held generally on November every year. There are
two more quadrennial competitions held every 4 years with 2 years apart from each
other:
FIFA World Cup is the most iconic football event in the world, 32 national teams
from all over the world are involved in this competition (France won the last Cup at
“Russia 2018”). UEFA Europe Cup is the most important football event for the
old continent, and 24 European national teams are involved in this competition
(Portugal won the last Cup at “EURO 2016” in France). These events are held during
the June–July of every calendar, attracting the interest of hundreds of millions of
fans and spectators. This huge organization and consumption worldwide create the
An Exploratory Study of Fans’ Motivation in Albanian Football Championship 189
best conditions for marketers, to analyze and evaluate in Albania, the motives and
reasons among their fans for football attendance. From this point of view, we will try
to understand how the variables like gender, age, and club influence the motivation
and fans’ behavior.
2 Literature Review
Generally being motivated means doing something that feeling inspirited to act
(Ryan & Deci, 2000). Basically, motivation is an important tool for understanding
consumer behavior (Shank, 1999). For James and Ridinger (2002), a significant
number of people who attend sport events consider themselves sport fans. According
to Agas, Georgakarakou, Mylonakis, and Panagiotis (2012), fans means expresses
enthusiasm, passion, and eagerness and even moving beyond reason. Fans are a
very important patrimony for all sports, for their support, energy, and emotional
enthusiasm toward players and clubs through their cheering and singing (Wiid &
Cant, 2015). Motivations generate behavior due to the satisfaction or enjoyment
generated during the events or game in the stadium (Dieci, 1971). For Sloan (1989),
most of fan behaviors fulfill social or psychological needs. Several models and
scales for measuring fan’s motivations in attending sport activities in the stadium
have been developed (Correia & Esteves, 2007; Hunt, Bristol, & Bashaw, 1999;
Izzo, Walker, Munteanu, Piotrowski, & Neulinger, 2014; Mehus, 2005; Wann,
1995). Based on the use of different scales and studies by researchers, it is constantly
understood that the motivations are very dynamic, even their characteristics are
traceable by the motivations of the fans (Kim & Chalip, 2004) . . . . . . For Dunning
(1999) fans had the pleasure to follow sports events not only to maintain social
contact with the rest of the fans but also for the emotions they experience through
sports. Based on the study conducted by Mehus (2005), motivation for euphoria
was more important than social one for fans. The results of study by Correia
and Esteves (2007) for fans in Portugal suggest that connection with their clubs’
entertainment and being in the group were the strongest motivation factors. The
study for Korea and Japan League, respectively, suggests that both countries were
very motivated to attend sports events in group, where Japanese fans preferred
to be accompanied with family members and Korean fans were motivated to be
with friends (Won & Kitamura, 2007). In most of Eastern countries, entertainment
and socializing influence motivate fans to attend football game in stadium, even
attendance in football matches is lower due the fact that structure is less developed
compared with rest of the Western countries (Izzo et al., 2014). As the most used
and common motivation scale deriving their conclusion from a decade-long series
of studies, Wann, Melnick, Russel, and Pease (2001) identified eight motives for
attending sporting events through Sport Fan Motivation Scale. The SFMS has been
used in one previous study for examining the impact of intrinsic and extrinsic
motivation factors among football fans in Albania. For the purpose of our study how
variables like gender, age, and club influence fan motivation will be based on SFMS
model composed of eight factors (Beccarini & Ferrand, 2007): 1—eustress (positive
and stimulative), 2—self-esteem enhancement, 3—escape, 4—entertainment, 5—
economic motivation, 6—esthetics, 7—group affiliation (need for belongingness),
and 8—family socialization.
Sport marketers and researchers must evaluate carefully the important factors
that influence fans to attend sport events. However, it is not easy to understand the
factors of diverse attendance, for the fact that people’s behavior is not measured by
a single motive or factor, even they have different profiles (Mashiach, 1980).
Gender differences in sports have attracted the attention of various scholars
from different fields including law, economics, history, sports sciences, psychology,
communications, and sociology, due to the fact that it is practiced almost in all
societies (Deaner, Balish, & Lombardo, 2015). As the number of sports that see
woman as protagonists has growing rapidly, their fan base is growing constantly
using sport also like a tool for supporting women rights. According to Dieztz-Uhler
(2002), both men and women sports fans are equal, which does not mean that
both of them have the same reasons for attending events or game in the stadium.
Meanwhile both of them aim to participate in sports events and have different
individual motives, which means that men are motivated to show that they have
better ability than other men, while woman are motivated to participate in sports to
improve their looks (Apostolou, 2015). According to, men and women have very
different attitude and mental system, that is why men are more interested towards
the game itself, instead women are more inclined towards family occasion, and they
consider the events as their educational leisure (Correia & Esteves, 2007). Scholars
suggests that women participate less in sports than men because they have less time
and are more involved with housework compared to men (Gantz & Wenner, 1991).
However, the differences based on the sexual differences for the motivations and
participation in football matches depend also from the role that women and men
have in their society.
The characteristics on motivations for football fans based on age differences in
football events take full life on the 16 and 18 years. Over the age of 18, every
young person is free to think and act in full autonomy up to the age of 65, and
once they retire the desire to be active in sport events begins to be less active with
the decrease in their incomes (Correia & Esteves, 2007). Both men and women tend
to participate more frequently in football events when they are young, at the same
time they participate less when they get older (Apostolou, 2015). For clubs and
marketers, it is very important that the age group between 18 and 65 years should
be motivated to attend the game every week in the stadium.
3 Methodology
The conduction of questionnaire was distributed across 11 football matches, to

ensure the representation of all football fans. As observed, typically, fans take their
seat on the stadium about 30 min before the match (on average). The conduction of
the questionnaire started at about 40 min before the match. Based on the literature,
questions capturing motivation factors for attendance were composed in a five-point
Likert scale (1 = not important to 5 = very important). Pretesting and piloting
were conducted to validate the relevance and full understanding of the motives
included. The pretesting was conducted with university students who were avid
football fans. The second pretesting was conducted during a championship match.
Although no important changes were made, small changes and fine tunings resulted
in an improved questionnaire. Finally, the questionnaire was piloted during two
championship matches, after which it was validated and ready for conduction.
A total of 768 interviews were conducted. The composition of the sample is
highly influenced by the actual attendance in Albanian stadiums. About 96% of the
sample is composed of male football fans, while only 4% of female football fans.
To present a better picture of the situation, 22 out of 36 women interviewed were in
Tirana, the capital city. The absence of women attendance in Albanian stadiums is
much due to the primitivity and vulgarity still occurring, and on the other hand to
the marginalized role of women in the Albanian society, which is mostly manifested
in the regions rather than in the capital city. However, this stands as a general
observation, an assumption, as there is no particular study to explore this issue.
On the other hand, the sample covers all age categories: 18–24 years old (27%), 25–
34 years old (24%), 35–44 years old (12%), 45–54 years old (16%), 55–64 years
old (16%), 65 years old, and over (5%).
The purpose of the analysis is to identify key constructs of the motivation
factors that affect the attendance using exploratory factor analysis. Exploratory
factor analysis is generally used to assist in the development of measurement
instruments by determining the dimensionality of a set of measured variables
and to determine the specific measured variables that best reflect the conceptual
dimensions underlying the set of measured variables (Fabrigar & Wegener, 2011).
To conduct the analysis, principal axis factoring estimation is used. Multivariate
analysis of variance (MANOVA) was used to explore whether there are differences
in the motivation factors between age groups and between organized football
fans (ultras) and non-organized football fans. According to Hair, Black, Babin,
Anderson, and Tatham (2018), if the ratio of the largest groups is more than 1.5,
a test for equality of variance is in precondition to the analysis. Conducting the Box
test, the equality of variance was concluded for both groups. The literature suggests
differences in motivation factors even between gender; however, the sample size of
only 4% female does not leave much room for a multivariate analysis of variance.
4 Results
Table 1 displays the sample’s descriptive statistics (mean and standard deviation)
of each of the original reasons that explain the motivation to attend a football
match. These values provide an initial sense of the primary trends that might be
underlined in this data. The highest value is “to closely support the team” (4.63),
Table 1 Descriptive Mean Std. dev

statistics
To closely support the team 4.63 0.87
To have fun 4.62 0.83
To be part of a group 2.64 1.69
To break away from the daily routine 4.07 1.25
To be with the family in the stadium 2.44 1.64
To be with friends in the stadium 4.44 1.02
To closely see the football players 3.61 1.53
To express my emotions 4.22 1.23
Is the most followed sport 4.59 0.91
It is a family tradition 3.44 1.63
I have played football 3.65 1.53
To dress in our team’s uniform 3.59 1.57
closely followed by “to have fun” (4.62), and “it’s the most followed sport” (4.59).
The reasons with the highest means appear quite diverse, as the first one purely
relates to fan’s presence to give support, the second one reveals the pure enjoyment
of watching a football match, while the third the following of a popular trend. The
lowest values are “to be with the family in the stadium” (2.44), closely followed
by “to be part of a group” (2.64). The two reasons with the lowest means offer an
individualistic taste of the football fans. But looking further, the reason “to be with
the friend in the stadium” (4.44) shows a significantly high mean, which inclines the
motivation toward a certain group.
To determine the number of common factors, Kaiser’s criteria (eigenvalue
above 1) and Scree test are employed. The appropriate number of factors cor-
responds to the number of eigenvalues prior to the last major drop in the plot
of eigenvalues from the reduced correlation matrix (Fabrigar & Wegener, 2011).
Basically, both approaches boil down to choosing components that have eigenvalues
greater than 1. Examining Fig. 1, the Scree plot, and produced eigenvalues, it shows
a departure from linearity with a three-factor result. Hence, the Scree test results
that three factors should be analyzed.
The KMO values is 0.80, above the cut-off point of 0.5, showing sampling
adequacy and suitability for EFA. Bartlett’s Test of Sphericity shows significance
at p < 0.01, which confirms that our sample has patterned relationships. Using
varimax rotation method to provide easily interpretable results, Table 3 shows the
rotated factor loadings. The pattern matrix contains coefficients seen as standardized
regression coefficients, in which common factors predict measured variables.
The results presented in Table 3 show the existence of three factors. The first
factor contains six different measured variables, the second and the third contain
three each. Considering the methodological notes of Tabachnick, Fidell, and Ullman
(2007), as a general rule of thumb, using an alpha level of 1%, a rotated factor
loading for a sample size of at least 300 would need to be at least 0.32 to be
considered statistically meaningful, while lower values might also be considered
for much larger samples. The sample size of the study is 768, which makes a strong
Fig. 1 Scree test criterion
case for the statistic validity of even factor loadings as “to break away from the daily
routine” (0.301), or “to be part of a group” (0.313). Looking further into the factor
loading, cross loadings do not constitute of a problem for the results. The only cross
loading is in the variable “to closely see the football players,” which mostly loads
at the third factor but has a significant load also on the first factor. The difference
between the primary and the secondary loading is lower than 0.1, which enables the
loading to be interpreted in both factors. However, considering the large nature of
the first factor, the factor loading will only be interpreted for the third factor, putting
also caution to the interpretation.
Analyzing the results, while considering the literature about the motivation
factors, as well as “reading between the lines,” the factors are named as follows:
(1) entertainment motivation factor; (2) tradition motivation factor; (3) group
involvement motivation factors. The entertainment motivation factor, relating to
Factor 1, is composed of the pure enjoyment, emotion, and satisfaction of watching
a football match, involving their favorite team. The tradition motivation factor
relates to the long history of football and the continuous impact it has had in
generations, which are still being passed on other generation—covered with a
glimpse of nostalgia about the child memory of playing football and wanting to
represent your favorite team. The group involvement motivation factor relates to
football as a shared interest within a group. The factor which seems to prevail is the
entertainment motivation factor.
Out of the motivation sources pertaining to Factor 1, “to have fun” shows the
highest coefficient, hence showing the strongest correlation. Other factor loadings
with strong correlations to Factor 1 are “is the most followed sport,” “to express my
emotions” as well as “to closely support the team.” On the other hand, the lowest
Table 2 Rotated factor loading matrix

Factor 1 Factor 2 Factor 3
To closely support the team 0.530 0.144 −0.007
To have fun 0.638 0.076 0.045
To break away from the daily routine 0.301 0.049 0.157
To be with friends in the stadium 0.481 0.138 0.165
To express my emotions 0.554 0.072 0.264
Is the most followed sport 0.590 0.183 0.014
It is a family tradition 0.156 0.508 0.241
I have played football 0.107 0.646 0.034
To dress in our team’s uniform 0.237 0.454 0.329
To be part of a group 0.080 0.120 0.313
To be with the family in the stadium 0.035 0.078 0.606
To closely see the football players 0.319 0.126 0.382
Table 3 Univariate comparisons of motivation factors by age groups

Motivational type means
18–
24 years
Overall old 25–34 35–44 45–54 55–64 65+ F p
Entertainment 4.42 4.34 4.29 4.50 4.59 4.50 4.51 4.505 0.000
Tradition 3.56 3.64 3.41 3.47 3.59 3.70 3.45 1.330 0.249
Group 2.89 3.07 2.92 3.06 2.77 2.62 2.63 3.877 0.002
involvement
coefficient is that of “to break away from the daily routine,” hence showing the
weakest correlation. Out of the motivation sources pertaining to Factor 2, “I have
played football” shows the strongest correlation, supporting the case of nostalgia
and self-affiliation with the played sport as a strong motivator for attendance.
Out of the motivation sources pertaining to Factor 3, “to be with the family in
the stadium” shows the strongest correlation, showing a family centric and group
approach motivation for attendance in a football match (Table 2).
Further, MANOVA was used to determine whether the motivation factors differ
for age groups. The MANOVA analysis showed strong statistical significance
(Wilks’ lambda 0.921, F 4.229) at the .00 level on all criteria, indicating that the
motivation factors differ across age groups. Hence, a univariate ANOVA was used to
further explore the differences. The results are displayed in Table 3. The results show
that age differences are significant in entertainment motivation factors (p < 0.05) and
group involvement motivation factors (p < 0.05), while no significant differences are
found in tradition motivation factors (p > 0.05). Looking further, the age group of
45–54 years old appear more inclined to entertainment motivation factors, while the
age group of 18–24 years old appear less inclined. On the other hand, the age group
of 18–24 years old appear more inclined to group involvement motivation factors,
while the oldest group (65+ years old) appear less inclined.
Table 4 Univariate comparisons of motivation factors by participation in an organized fan club

Motivational type means
Overall Part of a group Not part of a group F p
Entertainment 4.42 4.4233 4.4239 0.000 0.991
Tradition 3.56 3.93 3.44 24.597 0.000
Group involvement 2.89 3.45 2.72 67.148 0.000
MANOVA was used to determine whether the motivation factors differ between
football fans which are part of an organized fan club (supporters’ group or ultras).
Out of 768 interviews, 186 (32%) declared themselves to be part of an organized
fan group. The MANOVA analysis showed strong statistical significance (Wilks’
lambda 0.897, F 29.116) at the .00 level on all criteria, indicating that the motivation
factors differ between organized and non-organized football fans. A univariate
ANOVA was again used to further explore the differences. The results show
that differences in motivation factors between fans that are part of an organized
group and those who are not are most significant in group involvement motivation
factors (p < 0.05) and tradition motivation factors (p < 0.05), while no significant
differences are found in entertainment motivation factors (p > 0.05)—quite obvious
given the very similar means. Considering differences, organized football fans are
more motivated by tradition and by group involvement factors, while in the second
case the difference is considerable. In both cases, the results are aligned with
the expectations—football fans become part of a group to be jointly involved in
supporting the team and on the other hand these groups are known for their tradition
nuances (Table 4).
5 Conclusions
The analysis of the motivation factors of attendance in a football match is crucial

to this stage of development of Albanian football. The EFA resulted in 12 items
measuring three motivation factors. The entertainment motivation factor is the most
important one to explain attendance in a football match. This shows that Albanian
football fans primarily attend a football match to purely entertain themselves,
express emotion and satisfaction of watching a football match, involving their
favorite team. Entertainment stands out as the usual motivation for attending most
sport activities, besides the results show that two more other factors influence
attendance. The tradition motivation factor blends the passing through generations
of this tradition and the nostalgia of fans playing themselves. The group involvement
stands also as a motivation factor for attendance, confirming football as a shared
interest within a group. The analysis considered also differences in motivation
factors between age groups and participation or not in an organized fan group.
The results suggest that there are significant differences in motivation factors, both
between age and participation in a fan group. Some older groups (45–54 years
old) are more motivated to attend matches for entertainment, while other younger
age groups (18–24 years old) are more motivated to attend matches for group
involvement reasons. On the other hand, entertainment is equally perceived by
organized fans and non-organized ones, but organized fans were more motivated
to attend for traditional and group involvement factors.
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Evaluation of Knowledge in Accounting
of Regional Economic University
Students
Ivana Koštuříková and Markéta Šeligová
Abstract At present, education is considered not only as an integral part of

everyone’s life but also as an important element of their personal development.
Therefore, most young people in developed countries seek to acquire professional
knowledge by graduating from university. The aim of this paper is to present the
results of the research focused on the basic knowledge of accounting issues of
regional economic university students and their dependence on aspects of university
education. Research shows that almost one-third of students achieved very good
knowledge and 43% of students showed good accounting skills. Only 9% of
students had insufficient knowledge of accounting issues. Using the Kruskal–Wallis
test, the dependence of the accounting knowledge of SBA students on aspects of
university study was researched. Dependence on two aspects, the study field and
students’ work experience, has been demonstrated. This was confirmed by Pearson’s
Chi-square test. The intensity of dependence was then researched using Pearson
contingency coefficient. Based on the resulting values, it was possible to conclude
that this is not a close dependence.
Keywords Education · University studies · Work experience · Kruskal · Wallis

test · Pearson Chi-square test · Pearson coefficient
JEL Classification: I21, M41
I. Koštuříková () · M. Šeligová

Department of Finance and Accounting, School of Business Administration in Karviná, Silesian
University in Opava, Karviná, Czech Republic
e-mail: kosturikova@opf.slu.cz; seligova@opf.slu.cz
https://doi.org/10.1007/978-3-030-63970-9_15
200 I. Koštuříková and M. Šeligová
1 Introduction
The importance of education is constantly increasing. The educational level of

the population is increasingly influencing the prosperity and economic growth of
individual states. Education including lifelong learning is closely related to the issue
of competitiveness of companies and regions. In this context, professional education
as a system for collecting skills and competencies has an essential role to respond
to the rapidly changing labor market needs, modernizing and upgrading industries
and the development of the structure of job opportunities.
Gradual globalization, technical progress, innovation, and also changing social
values, the diversification of human resources, or the use of the natural environment,
among others, are the driving forces of the constantly changing business environ-
ment.
Education develops the personality of a person who will be equipped with
knowledge, skills, and competences not only for personal life but also for the
performance of a profession or work activity. The process of economic globalization
and the Czech Republic’s membership in the European Union require additional
new knowledge and competencies from the accounting profession, but at the same
time it opened the way for professional accountants to pursue a career at the
international level and the opportunity to do business on a much larger scale. The
professional qualification of an accountant is a necessary condition for the quality
performance of any of a number of possible accounting specializations at all levels.
2 Aim and Methodology
The aim of the article is to evaluate the level of knowledge of students from
School of Business Administration in Karviná (SBA) in the field of accounting
and to find out whether there is a dependence of their accounting knowledge on
the form and degree of their study, on the field of study and last but not least on
their work experience. In order to achieve the objective of the article, a research
question was determined: “How do university aspects affect student knowledge
of accounting issues?” As an aspect of university education were determined the
form of study (full-time versus part-time), the degree (bachelor’s versus follow-
up master’s), study field (Accounting and Taxes versus other economic fields), and
finally the work experience of students. The non-parametric Kruskal–Wallis test was
used to answer this research question.
According to Gravetter and Wallnau (2007), the Kruskal–Wallis test is a gen-
eralization of the nonparametric Mann–Whitney test for more than two groups
compared. It is used to compare two or more independent samples of the same or
different size. Like the Mann–Whitney test, it does not test the agreement of specific
parameters, but the conformity of the sample distribution functions of the compared
sets, with the key assumption being the independence of the observed values. The
Evaluation of Knowledge in Accounting of Regional Economic University Students 201
Kruskal–Wallis test shows that at least one sample stochastically dominates another
sample. Because it is a nonparametric method, the Kruskal–Wallis test does not
assume a normal residue distribution, unlike an analogous one-way analysis of
variance.
The main idea of the Kruskal–Wallis test is that, under the null hypothesis,
the pooled values from all the samples are so well mixed that the average order
corresponding to each sample is similar. To calculate the test, we reorder all
observations by size (as if they were from a single selection) and assign them to the
order values. The test statistics of Kruskal–Wallis test have the following form (1).
12 k T 2
Q= i
− 3 (n + 1) (1)
n (n + 1) i=1 ni
We reject the null hypothesis at the significance level α if the realization of

the test statistic Q is greater than the critical value (quantile) corresponding to the
significance level α.
Based on the acquired nominal data, the researched dependence was also verified
using the Chi-Square tests. Empirically determined frequencies (nij ) were compared
with the theoretical, or expected (eij ) frequencies, which represent the associated
frequencies expected under the assumption of independence of the variables. The
magnitude of the differences between empirical and theoretical frequencies is
assessed using test statistics (2).
c
r 2
nij − eij
χ =
2
(2)
eij
i=1 j =1
For the verification of the research question using Pearson’s chi-quadrate, the
SPSS statistical program was used to calculate the level of statistical significance
(i.e., p-value). The achieved level of statistical significance was examined at a
significance level α = 0.05. If the p-value is less than 0.05, the effect of university
studies’ aspects on the perception of the importance of the accounting profession is
demonstrated. In such a case, i.e., the demonstration of the effect between variables,
the intensity (tightness) of the dependence was further examined using the Pearson
contingency coefficient (3).

χ2
C= (3)
n + χ2
The closer the coefficient is to 1, the more intensity of the dependence is between
the characters, the closer the coefficient is to 0, the less intensity of the dependence
is.
3 Education and Accounting Profession
There is a constant talk about the need for education, training, and knowledge.
According to Beneš (2019), knowledge, i.e., information and their thought process-
ing, brings immediate effects, especially those that generate, among other things,
economic profit. Organized knowledge, also known as intellectual capital, is used to
create the wealth of a company (Vodák & Kucharčíková, 2011). Amstromg (2002)
defines intellectual capital as the stocks and flows of knowledge that are available in
an organization.
According to the Ministry of Education, Youth and Sports (2019), the content of
education of future generations must be comprehensively connected with education
in the areas of digital technologies, which permeate the entire process and spectrum
of teaching in all areas of regional education, due to the progressive technological
development. The aim of higher education is to provide students with appropriate
professional qualifications, to prepare them for research work, to participate in
lifelong learning, to contribute to the development of civil society and to develop
international, especially European, cooperation as an essential dimension of all
activities. As stated by Veteška and Tureckiová (2008), today lifelong learning is
perceived as a necessary process leading to active employment and employment in
the labor market. All Member States of the European Union, including the Czech
Republic, address this key aspect and determine an effective framework to support
structural reforms. Education reforms are taking place not only in Europe but
worldwide. For example, Donghui (2012) dealt with education reform in Chinese
universities.
Education plays a key role in shaping current and future economic growth,
as annual labor costs increase significantly with higher levels of education. This
development is also influenced by the quality of education; however, this impact is
manifested only with a certain delay (MEYS, 2015). Brožová (2003) emphasizes
education as a prevention against unemployment in the context of higher adapt-
ability to changing market demands. Riddell and Song (2011) investigate the causal
effects of education on employment and unemployment, with particular focus on the
extent to which education improves re-employment outcomes among unemployed
workers.
The essence of professional education is the creation and maintenance of
harmony between subjective and objective qualifications. A subjective qualification
is a set of competencies acquired during life with the potential possibility of use for
the performance of a certain activity. Objective qualifications are demands for the
performance of a specific profession (Mužík, 1998).
According to Tokarčíková, Kucharčíková, and Ďurišová (2015), universities have
a significant role in education, which are important centers of knowledge. Students
should acquire professional knowledge and should be able to apply this knowledge
in solving global problems. Boccanfuso, Larouche, and Trandafir (2015) deal with
the issue of the importance of university level and the impact of quality professional
education on the employment of skilled workers.
The importance of the knowledge of the accountant can be defined in connection

with the characteristics of the accountant profession, which is listed in the database
of the National System of Occupations of the Czech Republic. This database
identifies the following positions under the term “accountant”: auditor, principal
accountant in the business sector, payroll accountant, professional accountant, fixed
asset accounting officer, stockholding officer, accounting and auditing specialist,
independent accountant in the business sector and accounting methodology spe-
cialist in the business sphere (MLSA, 2017). Jaworska (2016) analyzed the role of
accounting specialists and the tasks they perform based on social responsibility, as
well as the directions of its change. Gibassier, Rodrigue, and Arjaliès (2015) dealt
with the role of accountants in integrated reporting. The professional accountants
were defined by Suddaby, Gendron, and Lam (2009).
The International Federation of Accountants is committed to the development of
the accounting profession, contributing to the adoption and implementation of high-
quality international ethical standards for accountants (IFAC, 2018). Other interna-
tional organizations such as the Association of Chartered Certified Accountants and
Institute of Management Accountants inquire into the causes of the changes that are
creating the environment for businesses and professional accountants (ACCA and
IMA, 2012). Professional accountants can effectively stabilize business (Šipková,
2013).
In the Czech Republic, the Chamber of Certified Accountants deals with
professional accountants. This institution focused on the issue of improving the
position of certified accountants on the labor market, increasing their prestige and
further education within the international project “Human Resources Development
in the Area of Certified Accountants” (CACR, 2014).
According to a survey by the Chamber of Certified Accountants, more than 69%
of professionally qualified financial accountants in the Czech Republic believe that
their level of qualification should be determined by the market itself, and 71% of
the respondents believe that entrepreneurs do not currently fully appreciate the
risks associated with the wrong choice of accountant. Employers often mistak-
enly perceive accountants only as a non-profit expense item, while a qualified,
knowledgeable, and experienced accountant can provide management with not
only accounting but also tax and legal information that is relevant to its economic
decision-making (CACR, 2013).
4 Accounting Knowledge of SBA Students
The accounting knowledge of full-time and part-time students from the School of
Business Administration in Karviná was researched in an internal project “New
trends and specifics of accounting in the context of legislative changes in the Czech
Republic.” The structure of respondents is shown in Table 1.
Marking of SBA students’ knowledge in the field of accounting was based on the
standard classification at European universities—The European Credit Transfer and
Table 1 The number of Number of respondents

respondents according to
aspects of university study Full-time students 252
Part-time students 457
Bachelor’s degree students 521
Follow-up master’s degree students 188
Students of the Accounting and Taxes field 178
Students of the other fields 531
Source: Own processing
Table 2 Accounting Level of knowledge ECTS grades Number of students

knowledge of students
Very good A–B 225
Good C–D 303
Sufficient E 113
Fail F 68
Source: own processing
full-time form 27,78% 44,84% 17,86% 9,52%
part-time form 33,92% 41,58% 14,88% 9,63%
0% 20% 40% 60% 80% 100%

Very good (A-B) Good (C-D) Sufficient (E) Fail (F)
Fig. 1 Accounting knowledge of students according to the form of study. Source: Own processing
Accumulation System. ECTS is a tool for increasing the effectiveness of studies and
courses and contributes to improving the quality of university education (European
Commission, 2017). In Spain, for example, Cañibano (2008) addressed the process
of adapting Spanish universities to the Bologna Principles.
For a clearer view, the students’ knowledge was rated as “very good” in case of
grading A and B, “good” in case of grading C and D, “sufficient” in case of grading
E and “fail” in case of grading F (Table 2). Almost one-third of students achieved
very good knowledge, and 43% of students showed good accounting skills. Only
9% of students had insufficient knowledge of accounting issues.
In the part-time form of study, more students had very good knowledge than in
the full-time form; on the other hand, full-time students had more good knowledge.
In both forms of study, the lack of knowledge in the field of accounting manifested
itself in approximately the same percentage of students as shown in Fig. 1.
bachelor degree 32,26% 40,32% 16,67% 10,75%
follow-up master´s degree 31,55% 43,59% 15,68% 9,18%
0% 20% 40% 60% 80% 100%

Fig. 2 Accounting knowledge of students according to the degree of study. Source: Own
processing
AT field 40,68% 38,98% 11,86% 8,47%
other fields 28,76% 43,98% 17,29% 9,96%
0% 20% 40% 60% 80% 100%

Fig. 3 Accounting knowledge of students according to the field of study. Source: Own processing
If we compare students of different degrees of study, namely the bachelor’s

degree and the follow-up master’s degree, their knowledge in the field of accounting
is remarkably similar. As can be seen from Fig. 2, more students have a good
knowledge at the bachelor’s degree (about 3% points) than at the master’s level,
where more than 1.5% points of students demonstrated insufficient knowledge
compared to bachelor’s degree students.
Students of the field of Accounting and Taxes (AT) should have the greatest
awareness of accounting issues in comparison with students of other fields. This
premise is evidenced by Fig. 3, which shows that the very percentage of students in
the AT field demonstrated very good knowledge about accounting issues. The least
students in this field also had insufficient accounting knowledge.
Figure 4 shows that students who have work experience in the field of economics
have the most good knowledge of accounting issues (42.42%). In the case of
students without work experience, this level of knowledge was achieved by only
24% of respondents. Students who have work experience but in the noneconomic
working in the
42,42% 38,26% 12,12% 7,20%
economic field
working in the
non-economic 26,12% 45,70% 16,84% 11,34%
field
not working 24,03% 44,81% 20,78% 10,39%
0% 20% 40% 60% 80% 100%
Fig. 4 Accounting knowledge of students according to work experience. Source: Own processing
Table 3 The influence of the Test statistics

form of university study on
the level of accounting Kruskal–Wallis H 2.135
knowledge df 1
Asymp. sig. 0.144
Source: Own processing in
the SPSS program
Table 4 The influence of Test statistics

university degree on the level
of accounting knowledge Kruskal–Wallis H 0.109
df 1
Asymp. sig. 0.741
Source: Own processing in
the SPSS program
field have the most good knowledge (45.7%). This group, on the other hand, has the
highest percentage of students with insufficient knowledge of accounting (11.34%).
It was also determined by a questionnaire survey how students of both full-time

and part-time forms of study at the School of Business Administration perceive the
accounting profession in the Czech Republic. In the survey, 1035 students were
approached, and the questionnaire filled 709 people.
The non-parametric Kruskal–Wallis test was used to determine the influence of
the form and degree of university study, as well as fields of study and, last but
not least, the work experience of SBA students on the level of their accounting
knowledge. The results are shown in Tables 3, 4, 5 and 6.
Table 5 The influence of the Test statistics

field of study on the level of
accounting knowledge Kruskal–Wallis H 8.564
df 1
Asymp. sig. 0.003
Source: Own processing in the SPSS
program
Table 6 The influence of Test Statistics

work experience on the level
of accounting knowledge Kruskal–Wallis H 21.567
df 2
Asymp. sig. 2.074E − 05
Source: Own processing in the SPSS
program
Table 7 The influence of work experience on the level of accounting knowledge

Chi-Square tests Value df Asymp. sig.
Field of study Pearson Chi-Square 10.214a 3 0.017
Work experience of students Pearson Chi-Square 24.711a 6 3.862E − 04
No. of valid cases 709
Source: Own processing in the SPSS program
a – 0 cells (0,0%) have expected count less than 5
As can be seen from the results of Tables 3 and 4, the form of study (full-time
versus part-time) and the degree of study (bachelor’s versus follow-up master’s) do
not affect students’ level of knowledge, as significance values are greater than 0.05.
In contrast, in the field of study, the dependence of students’ accounting
knowledge on this aspect has already been proved, as shown in Table 5.
Students “work experience had the most significant effect on students” knowl-
edge of accounting, as shown in Table 6.
Pearson’s chi-square test was performed to verify the dependence of the level
of accounting knowledge on the field of study and on the student’s work experi-
ence (Table 7). Based on the detected levels of statistical significance, where all
significance values are less than 0.05, it can be stated with 95% probability that the
level of knowledge of SBA students depends on their field of study and their work
experience.
The contingency coefficients were also calculated to determine the intensity of
the dependence, and since their value is close to 0, no close dependence can be
concluded (Table 8).
Table 8 Intensity of dependence of student knowledge level

Symmetric measures Value Appr. sig.
Field of study Contingency coefficient 0.119 0.017
Work experience of students Contingency coefficient 0.184 3.862E − 04
No. of valid cases 709
Source: Own processing in the SPSS program
6 Conclusion
Education develops the personality of a person who will thus be equipped with
knowledge, skills, and competences not only for personal life but also for the
performance of a profession or work activity. The process of economic globalization
and the Czech Republic’s membership in the European Union require further new
knowledge and competencies from the accounting profession, but at the same time
it opened the way for professional accountants to pursue a career at the international
level and the opportunity to do business on a much larger scale. The professional
qualification of an accountant is a necessary condition for the quality performance
of any of a number of possible accounting specializations at all levels.
The aim of the article was to assess the accounting knowledge of full-time and
part-time students from the School of Business Administration in Karviná. The
results of the questionnaire survey show that almost 32% of students have very good
knowledge of accounting and almost 43% of respondents have demonstrated good
knowledge in this area.
Using the Kruskal–Wallis test, the dependence of the accounting knowledge of
SBA students on aspects of university study was researched. Dependence on two
aspects, the study field and students’ work experience, has been demonstrated. This
was confirmed by Pearson’s Chi-square test. The intensity of dependence was then
researched using Pearson contingency coefficient. Based on the resulting values, it
was possible to conclude that this is not a close dependence.
Acknowledgments This research was financially supported by the Ministry of Education, Youth
and Sports within the Institutional Support for Long-term Development of a Research Organization
in 2020.
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Publishing.
Corporate Governance Disclosure
in Slovak Banks
Janka Grofčíková, Katarína Izáková, and Dagmar Škvareninová
Abstract Effective corporate governance is essential for proper functioning of

the banking sector and the economy as a whole. Banks play an important role
in the economy by channelling savings and depositors’ funds into activities that
support entrepreneurship and help drive economic growth. From this point of view,
safety and reliability of banks are key to financial stability, and therefore the way
they do business is crucial to economic health. We assume that the significance
of the banking sector and of systemically important banks, in particular, should
also be reflected in more accurate reporting on corporate governance compared to
other banks. The aim of our paper is to examine the compliance of information
reported under the current legislation in the Slovak Republic with the principles
of the G20/OECD on corporate governance, which were accepted by the Slovak
Association of Corporate Governance. Specifically, we focus on those principles
that are outlined in Part V. Disclosure and Transparency. Through the research we
examine accuracy of reporting in the banks on the Slovak financial market, and
subsequently we determine their order. We also compare reporting in systemic and
nonsystemic banks, and for the issuers of securities and banks whose securities
are not issued on the regulated market in Slovakia. The research is done through
Friedman test, Wilcoxon Signed Ranking Test, Kruskal–Wallis test and Kendall’s
coefficient of concordance. Our findings indicate that reporting on corporate
governance is more accurate in the systemic banks and issuers of securities in
comparison with other banks.
Keywords Corporate governance · Disclosure · Slovak banks
J. Grofčíková () · K. Izáková · D. Škvareninová

Faculty of Economics, Department of Finance and Accounting, Matej Bel University in Banská
Bystrica, Banská Bystrica, Slovakia
e-mail: janka.grofcikova@umb.sk; katarina.izakova@umb.sk; dagmar.skvareninova@umb.sk
https://doi.org/10.1007/978-3-030-63970-9_16
212 J. Grofčíková et al.
1 Introduction
Banks play a crucial role in the economy through providing funds from savers
and depositors to activities that support business and help to drive the economic
growth. Thus, security and reliability of banks are the basis for financial stability,
and therefore the way they do business is a key to the economic health of society.
Weaknesses in governance in banks, which play an important role in the financial
system, can lead to the transmission of problems throughout the banking sector
and the economy as a whole. Therefore, effective corporate governance (CG) is
inevitable for the proper operation of the banking sector and the economy as a
whole, taking also the fact that the European economy is financed mainly through
banks into consideration.
The Capital Requirements Directive IV (CRD IV) and the Capital Requirements
Regulation (CRR) are the measures that were approved in order to strengthen the
financial system at the G-20 level in 2009, and are reflected in the outputs of the
Basel Committee on Banking Supervision (the so-called Basel III concept). The
Basel III concept consists of the three pillars. The first pillar determines the quanti-
tative requirements of banks, the second pillar sets the qualitative requirements for
management, including also the so-called corporate governance, which is the system
of banks governance. And finally, the third pillar defines the requirements for market
discipline and transparency of disclosure. The guidelines of the Basel Committee
are based on the principles of CG published by the Organization for Economic Co-
operation and Development (OECD). The aim of the generally accepted and used
OECD Principles is to assist governments in their efforts to evaluate and improve
their CG frameworks and to provide guidance to financial market participants and
regulators.
2 Literature Review
The concept of CG has been studied by several authors, such as Cadbury (1992),
Shleifer and Vishny (1997), Millstein (1998) and others. Basically, these aforemen-
tioned authors pay attention mostly to non-financial corporations. In the year 1992,
the first Code of Corporate Governance was developed by Adrian Cadbury. For
the first time he executed the Code in which principles of CG were incorporated.
The term CG refers to the system by which companies are managed and controlled
(Cadbury, 2002). Musa, Musová, and Debnárová (2014) extends this statement as
he says that the application of CG principles has, in addition to the impact on
innovation potential, also an impact on corporate performance. Impact of CG on the
financial performance and corporate social responsibility of insurance companies
was also investigated by Grofčíková and Izáková (2019) and Grofčíková, Izáková,
and Škvareninová (2019).
Corporate Governance Disclosure in Slovak Banks 213
With regard to systemic importance, there are several studies that examine these
issues in the area of banking sector, such as Adams (2012), Beltratti and Stulz
(2012). These authors pay attention to bank governance before and after the period
of financial crisis. Besides these, more economists and authors deal with the specific
issue of CG in banks. In her studies, Marcinkowska (2014) presents an objective
analysis of the concept of CG. Her research results are critical of banking practice,
as well as legal solutions and supervisory authorities. The findings of Andreás and
Vallelado González (2008) indicate that the composition and size of Bank Boards
are related to the capability of directors to monitor and supervise their management,
and that larger and less-independent Boards may prove more effective in monitoring
and advising, and thus they may create a higher value. Anginer et al. (2018) examine
whether CG to shareholders leads to greater risk in larger banks compared to their
smaller counterparts, as larger banks generally benefit from greater protection of
the financial safety net due to their “too big to fail” status. At the same time, they
also deal with the question whether shareholder-friendly CG may increase risks of
banks in the countries with more generous financial safety nets. Brandao-Marques,
Correa, and Sapriza (2020) conclude that in the field of banking, the presence of
moral hazard which is induced by government support may lead to reduction of
bank complexity and thus this may strengthen market discipline.
Various elements of CG that are related to bank performance in the period of
crisis are analysed by Aebi, Sabato, and Schmid (2012). The impact of higher capital
requirements imposed by Basel III regulatory reforms and its macroeconomic
impacts are monitored by Fidrmuc and Lind (2020). The transmission of shocks
in global and domestic banking sectors is analysed by Dungey, Flavin, and Lagoa-
Varela (2020). Their studies also provide some findings in terms of the Euro
area. Another reason why CG is becoming increasingly important, the banking
sector included, is that with advances in communications technology, detailed
information on individual corporations and their national governance frameworks
is now available on computer screens, and thus it may intensify the level of their
public control and evaluation.
International institutional investors are of a high importance in terms of applying
the same security and return tests worldwide, in the countries in which the funds
are placed. Convergence of this kind may generally raise CG standards as these
investors seek and expect the same levels of government efficiency, transparency,
accountability and financial integrity in various places of their investments. Basi-
cally, banks that are responsible for allocating these funds face the same problems as
institutional investors. They have the same responsibility for efficiency and integrity
as they manage and control the companies they finance. As a result, and regardless
of their source, the funds will be used by the companies around the world that meet
internationally recognized CG standards (Claessens, 2003).
3 Characteristics of the Slovak Banking Sector
There are 12 commercial banks1 and 15 branches2 of foreign banks operating in

Slovakia as of 1 April 2020. According to the Act on Banks no. 483/2001 Collection
of Laws, commercial banks are defined as legal entities with the seat in the territory
of the Slovak Republic, established as joint-stock companies that accept deposits
and provide loans in addition to other banking activities.
The development of the assets of the Slovak financial sector in the last decade has
been most significantly influenced by the development in the banking sector, which
manages more than 70% of the assets of the entire financial sector in Slovakia. In
2018, two-thirds of bank assets were loans, of which 75% were provided by the four
largest banks (VUB, SLSP, TB, ČSOB)1 , 10% of loans were provided by medium
and small banks, and slightly over 6% by foreign banks.
During the period under review, the total liabilities of credit institutions were
mostly affected by the loans and deposits that were received in the range of 75 –
79%. Credit claims account for the largest share of total assets of credit institutions
(as on 31 December 2018 it was 81.5%, while in the year 2010 the share was 69%),
and securities other than shares and share certificates (as on 31 December 2018 it
was 12. 9%, while in 2010 this share represented 25% of total assets).
Development in the retail loan market is considered to be the factor that
significantly influenced the stability of the Slovak banking sector. With regard to
domestic credit receivables, the volume of which amounted to 59.4 billion EUR
in 2018, in comparison with 36.7 billion EUR in 2012, retail loans accounted for
a stable 93 – 94% share. As we can see in Fig. 1, these are the households and
self-employed (sole proprietors) that represent the highest rate of retail deposits and
loans.
Slovakia ranked among the countries with the highest growth of retail loans in the
European Union, which were achieving a year-on-year growth for almost three years
from 2012. In December 2014, this year-on-year growth was 13.5% (subsequently,
the year-on-year growth decreased to 11.7% in 2017, and to 10.3% in 2018, in the
1 Československá obchodná banka, a. s. (The Czechoslovak Trade Bank, hereinafter only ČSOB);
ČSOB stavebná sporitel’ňa, a. s. (ČSOB Building Savings bank, abbreviation used ČSOB SS);
OTP Banka Slovensko, a. s. (OTP Bank Slovakia, OTP); Poštová banka, a. s. (Post bank, PB);
Prima banka Slovensko, a. s. (Prima bank Slovakia, abbrev. used Prima); Privatbanka, a. s. (Privat);
Prvá stavebná sporitel’ňa, a. s. (First Building Savings bank, PSS); Slovenská sporitel’ňa, a. s.
(Slovak Savings Bank, SLSP), Slovenská záručná a rozvojová banka, a. s. (Slovak Guarantee and
Development Bank, SZRB); Tatra banka, a. s. (Tatra bank, TB); Všeobecná úverová banka, a. s.
(General Credit Bank, VÚB); Wüstenrot stavebná sporitel’ňa, a. s. (Wüstenrot Building Saving
bank, Wüstenrot).
2 Citibank Europe plc (abbreviation used—Citibank); Fio banka, a. s. (Fio bank, Fio), J&T Banka,
a. s. (J&T bank, J&T); Komerční banka, a. s. (Commerz bank, KB); mBank S.A. (mBank);
Oberbank AG; Raiffeisen Centrobank AG (Raiffeisen), UniCredit Bank Czech Republic and
Slovakia, a. s. (Unicredit); BKS Bank AG (BKS); BNP Paribas Personal Finance SA (BNP);
Československé úvěrní družstvo (Czechoslovak credit cooperative, ČSUD); Cofidis SA (Cofidis);
Commerzbank AG (Commerz); ING Bank N.V. (ING); KDB Bank Europe Ltd. (KDB).
Fig. 1 Total volume of retail deposits and loans in the balance sheets of Commercial Banks in the
Slovak Republic at the end of the period (in mil. EUR)
amount of 3.4 billion EUR with retail loans included). In 2016, the share of loans
to households in their disposable income was the highest in the Slovak Republic
among the 11 countries of Central and Eastern Europe. Considering this fact we
can assume that this share was the only one growing, and its value doubled from
the beginning of the crisis. In addition to the rapid growth in the volume of loans,
the volume of non-performing loans was also growing. In order to support financial
stability, in the year 2014 the National Bank of Slovakia issued recommendations
with regard to macro-prudential policy on the risks associated with developments
in the retail credit market. It was not until 2019 that the year-on-year growth of
retail loans slowed to 7.9% in December. Together with the October (7.8%) and
November (7.7%) growth rates, this has been the lowest recorded value since the
inception of mortgage banking in Slovakia (NBS, 2020).
According to the tenth Allianz Global Wealth Report, 2019, which analysed
the financial assets and debts of households in 53 countries worldwide in 2018,
Slovakia is the only country among 11 countries in Central and Eastern Europe
where household debts exceed savings per capita by more than 1000 Euros. The
debt of the average Slovak is 7437 Euros, while the average in the region is 4868
Euros. Furthermore, the average amount of savings for the average Slovak is 6255
Euros, while the average for the region is 11,337 Euros. At the same time, retail
deposits in the SR reversed the slowdown trend and increased by 4.8% in 2017 and
by 6.9% in 2018. That time the volume of non-term deposits as well as savings
deposits was growing, while term deposits at least stabilized the pace of decline. In
the year 2015, the debts of Slovaks began to exceed their savings, when the debt
of a Slovak reached the value of 5570 Euros. While comparing all the monitored
countries in that particular period, we can see that the Slovak households reported
up to 64% of their savings deposited on retail deposits (in comparison with 45% on
average in Eastern European countries).
With regard to the fact that majority of commercial banks operate in Slovakia
as subsidiaries of their foreign parent banks, when it comes to their corporate
governance they refer to their financial groups on their websites. One of them is
for example ČSOB. As this bank is part of the ČSOB Financial group, it follows
the rules of administration and management of joint-stock companies which are
based on the principles set by the OECD. Similarly, SLSP in its annual report
states that the principles of CG are applied in accordance with the commitment
of the parent company SLSP Erste Group Bank, which was declared in 2003 and
in which it voluntarily undertook to comply with the Austrian CG Code. At the
same time, SLSP, a member of the Slovak Association of Corporate Governance
(SACG hereinafter), subscribed to the Code of Corporate Governance in Slovakia,
which was issued by this association. In terms of responsible business, VÚB, as a
member of the VÚB Group, follows the rules and policies of the parent company
Intesa Sanpaolo. In its annual report, Tatra bank, as part of the Raiffeisen Banking
Group, states that CG is applied in compliance with the CG Code in Slovakia, which
is publicly available on the website of the SACG.
Similarly, OTP bank agrees with an improvement of the level of CG, and
subsequently this bank adopted the CG Code in Slovakia (The Code of Corporate
Governance in Slovakia, 2016). At the same time the bank issued a statement on
CG pursuant to Act no. 431/2002 Collection of Laws on Accounting, Section 20
paragraph 6.
In its annual report, Prima bank informs that it complies with the Code
of Governance, which is available on the Bratislava Stock Exchange (BCPB
hereinafter) website. However, in its annual report, Post bank states only the
information on the social responsibility of the bank (which is also documented by
the aforementioned banks), but this report does not include any information on its
CG. All in all, the authors Bhimani and Soonawalla (2005) recommend that CG and
social responsibility should be perceived as two sides of the same coin. However, in
this paper we do not intend to discuss this issue in more details as we primarily pay
attention to the specific issues of CG.
4 Methodology
The banking sector is one of the most important sectors of every economy, and it is
not otherwise in Slovakia. As of 31 December 2019, a total of 12 commercial banks1
had their registered offices in Slovakia. In addition, 15 branches2 of foreign banks
operate in the Slovak Republic. With regard to the availability of the examined data,
our basic set consists of a total of 23 banks, of which 12 are with the seat in the
Slovak Republic and 11 banks are the branches of foreign banks.
The objective of our paper is to explore the compliance of information reported
under applicable legislation in the Slovakia with G20/OECD Corporate Governance
Principles, as these have also been accepted by the (SACG) Slovak Association
Corporate Governance.
In terms of the particular period, our research will pay attention to the reporting
years from 2015 to 2019. We have made this selection due to the fact that the year
2015 is the year of the latest modifications of the guideline G20/OECD and Basel
principles for banks affecting corporate governance reporting. On the other hand,
this particular selection is related to the fact that this year the European Central Bank
started to identify systemically important banks of individual countries as well as
specify the conditions for their capital requirements. In Slovakia, five systemically
important banks were designated under the Decision of the NBS No. 4 of 26 May
2015. These are ČSOB, Post bank, SLSP, Tatra bank and VÚB (abbreviation see
footnote 1). In the case of all of these banks, it is the Central Bank which determines
the amount of the countercyclical capital cushion on a quarterly basis in accordance
with Section 33 letter g. With effect from 20 May 2020, this amount shall be set at
a rate of 1.5%.
Information about financial situation and corporate governance of banks is drawn
from their annual reports for the years 2015–2019 that are published on the websites
of these individual banks. We investigate the scope, quality and structure of the
published information on corporate governance. The extent and quality of the
published information is quantified by a score from 0 to 2, where 0 means the
information is not published, 1 means the information is only partially published,
2 means the information is published in details as requested. Within the period of
these years, we monitor changes in the scope, quality and structure of the reported
information through the corporate governance disclosure index, which we calculate
separately for each bank and for every individual principle of corporate governance.
The corporate governance disclosure index is quantified as follows:
1. CGDI: as the ratio of the number of points obtained (numerator) and the total
number of points obtained by all banks (denominator). The total sum of the
indices is 1;
2. CGDI(max) : as the ratio of the number of points obtained (numerator) and the
maximum number of points that the bank might have obtained (denominator).
The maximum number of points that the bank might have obtained is equal to
the product of the number of examined principles and the maximum number of
points, i.e. 27 principles * 2 points = 54 points. When calculating the index for
each principle, the maximum number of points is 46 (23 banks * 2 points). Its
total value in Table 1 is expressed as an average.
We assume that the importance of systemically important banks should also be
reflected in more accurate reporting of corporate governance in comparison to other
banks.
Through the selected financial indicators as well as the Friedman and Wilcoxon
tests (H0 : μ0 = μ1 ; H1 : μ0
= μ1 ), we will verify the position of systemically
important banks in the Slovak financial market and determine the order of informa-
tion published in accordance with the examined principles of corporate governance.
We examine the disclosure of 27 information in accordance with the G20/OECD
Table 1 Corporate governance disclosure

Principles p1 p2 p3 p4 p5a p5b p5c
CGDI(max) 0.848 0.804 0.478 0.652 0.370 0.391 0.478
Average 1.696 1.609 0.957 1.304 0.739 0.783 0.957
CGDI 0.073 0.069 0.041 0.056 0.032 0.034 0.041
Principles p6a p6b p7 p8a p8b p9a p9b
CGDI(max) 0.630 0.130 0.630 0.326 0.304 0.565 0.413
Average 1.261 0.261 1.261 0.652 0.609 1.130 0.826
CGDI 0.054 0.011 0.054 0.028 0.026 0.049 0.036
Principles p9c p10 p11a p11b p11c p12a p12b
CGDI(max) 0.217 0.413 0.304 0.087 0.370 0.478 0.391
Average 0.435 0.826 0.609 0.174 0.739 0.957 0.783
CGDI 0.019 0.036 0.026 0.008 0.032 0.041 0.034
Principles p12c p12d p12e p13 p14 p15 Average
CGDI(max) 0.348 0.348 0.304 0.478 0.370 0.457 0.429
Average 0.696 0.696 0.609 0.957 0.739 0.913 0.858
CGDI 0.030 0.030 0.026 0.041 0.032 0.039 0.037
Bank ČSOB ČSOB SS OTP Post bank Prima Privat PSS
B/BFB B B B B B B B
CGDI(max) 0.630 0.426 0.500 0.500 0.259 0.185 0.556
Average 1.259 0.852 1.000 1.000 0.519 0.370 1.111
CGDI 0.061 0.041 0.048 0.048 0.025 0.018 0.053
Bank SLSP SZRB TB VUB Wüstenrot J&T KB
B/BFB B B B B B BFB BFB
CGDI(max) 0.815 0.370 0.407 0.593 0.296 0.741 0.926
Average 1.630 0.741 0.815 1.185 0.593 1.481 1.852
CGDI 0.078 0.036 0.039 0.057 0.029 0.071 0.089
Bank mBank Oberbank BKS Raiffeisen Commerz ČSÚD BNP
B/BFB BFB BFB BFB BFB BFB BFB BFB
CGDI(max) 0.926 0.111 0.926 0.204 0.019 0.056 0.111
Average 1.852 0.222 1.852 0.407 0.037 0.111 0.222
CGDI 0.089 0.011 0.089 0.020 0.002 0.005 0.011
Bank ING KDB Citibank FIO UniCredit Cofidis Average
B/BFB BFB BFB BFB BFB BFB BFB x
CGDI(max) 0.704 0.130 x x x x 0.452
Average 1.407 0.259 x x x x 0.858
CGDI 0.068 0.012 x x X x 0.043
CGDI corporate governance disclosure index, B bank, BFB branch of a foreign bank; for bank
abbreviation, see footnotes 1 and 2
Principles of corporate governance, Chapter V. Disclosure and transparency. Their

characteristics are presented in chapter 5.4. With Kendall’s coefficient of concor-
dance, we verify the agreement in the distribution of the investigated principles (H0 :
W = 0; H1 : W
= 0). Through the Kruskal–Wallis test (H0 : μ0 = μ1 ; H1 : μ0
= μ1 ),
we will verify the scope and quality of reported information that is published by
the systemic banks and issuers of securities which are admitted to trading on the
regulated market of the Slovak Republic. The formulated hypotheses will be verified
at the significance level α = 0.05.
5 Empirical Results and Discussion
5.1 Legislation for Reporting of Information by Banks

in Slovakia
The reporting of information by banks and foreign bank branches in Slovakia is

governed by several legislative standards.
The primary legal regulation of the activities of banks in Slovakia is the Act
on Banks No. 483/2001 Collection of Laws. Pursuant to Section 6 of this Act,
the activities of banks and branches of foreign banks are subject to supervision
by the NBS. In terms of supervision of banks, the NBS reviews and evaluates
the organization of management, the allocation of responsibilities, the strategies
adopted, the systems and procedures in place to carry out authorized banking
activities, the information flows and risks to which banks may be exposed and at
the same time verifies their sufficient coverage by equity. Article 37 of the Act on
Banks determines the information that banks are obliged to publish on their websites
and on their premises. This information must be published in the Slovak language
in a comprehensible and written form.
The content of the annual report is primarily determined by Section 20 of Act
No. 431/2002 Collection of Laws on Accounting. The annual report shall contain
the financial statements for the accounting period for which it is prepared and the
auditor’s report on these financial statements, unless a special regulation provides
otherwise. An entity’s annual report shall present a true and fair view and shall be
audited within 1 year of the end of the reporting period.
In addition, the information to be published by the Bank in its Annual Report is
supplemented by the Act on Banks in Section 37 paragraphs 6 and 9.
If the published information is incomplete or deviates significantly from the
current position of the bank, then the bank is obliged to publish the information
on the corrective measures without delay.
For the purposes of supervision and in accordance with Section 37 paragraph
14 letter (c) to (e) on the Act on Banks, the NBS issued the Measure of NBS no.
16 of 2 September 2014 on the disclosure of information by banks and branches
of foreign banks. This Measure was later amended by NBS Measure no. 13 of 20
October 2015.
The exact structure and content of information in the form of statements
that banks are obliged to submit to the NBS are defined by NBS Measure no.
3/2017, NBS Measure no. 13/2017 and NBS Measure no. 17/2014. However, this
information is not freely available to the public, and it is not disclosed in such details
in the financial statements and annual reports. This information is used only for the
needs of NBS to regulate and supervise the banking sector.
Reporting on CG is governed by Section 20 paragraphs 6–8 on the Accounting
Act. The corporate governance statement, as a separate part of the annual report, is
required to list those companies that have issued securities and have been admitted
to trading on a regulated market. Pursuant to that amendment, the content of this
declaration is as follows:
(a) a reference to the CG code that applies to it, or which the company has decided
to adhere to, and the information where the CG code is publicly available,
(b) all relevant information on management methods and the information it is
available,
(c) information on deviations from the CG code and the reasons for such deviations,
or information on non-application of any CG code and the reasons for which this
code has not been applied by the bank,
(d) a description of the main internal control and risk management systems in
relation to the financial statements,
(e) information on the activities of the General Meeting, its powers, a description
of the rights of shareholders and the implementation procedure,
(f) information on the composition and activities of the company’s bodies and their
committees.
5.2 Principles of Corporate Governance for Banks
The basic documents that regulate the information required for CG reporting include
the G20/OECD Principles of corporate governance as of the year 2015, as well as
the Corporate governance principles for banks issued in July 2015 by the Basel
Committee on Banking Supervision.
The main objective of bank governance should be to sustainably secure the inter-
ests of stakeholders in a manner consistent with the public interest. The Guidelines
reinforce the responsibilities of banks’ managing authorities for supervision and for
risk management in particular. The implementation of these principles should be
proportionate to the size, complexity, structure, economic significance, risk profile
and a business model of the bank. Among stakeholders, particularly retail banks, the
shareholders’ share would be secondary to depositors’ interests.
The G20/OECD principles of CG consist of six individual chapters: (1) Ensuring
the basis for an effective CG framework, (2) The rights and equitable treatment of
shareholders and key ownership functions, (3) Institutional investors, stock markets,
and other intermediaries, (4) The role of stakeholders in CG, (5) Disclosure and
transparency, and (6) The responsibilities of the board. Each of the chapters contains
a list of supporting sub-principles, supplemented by explanatory notes.
Corporate governance principles for banks (2015) determine the allocation of

powers and responsibilities of the governing bodies and top management of the bank
with an emphasis on the bank’s strategy and objectives, control functions, employee
selection and supervision, day-to-day operations, protection of depositors’ interests
and taking the interests of other stakeholders into account, with an emphasis on
aligning the bank’s corporate culture, activities and behaviour in line with the
expectation that the bank will operate in a safe and reliable manner, with integrity
and in accordance with applicable laws. The guidelines of the Basel Committee are
based on the principles of CG published by the OECD. The OECD Principles aim
to assist governments in their efforts to evaluate and improve their CG frameworks
and provide guidance to financial market participants and regulators.
The Principles for enhancing Corporate governance, presented by the Basel
Committee in October 2010, have represented a continuous development of the
Committee’s long-standing efforts to promote good CG practices in banking
organizations. The 2010 Principles aimed to reflect on the key impacts of the global
financial crisis that started in 2007 and to improve the way banks are able to
manage themselves and at the same time the way of supervision of particular bodies
related to this critical area. One of the main objectives of the 2015 modification
was to strengthen the Board’s accountability in the area of collective supervision
and risk management. Another important goal was to emphasize key elements of
risk management, such as risk culture, willingness to undertake risk, and their
relationship to the bank’s risk capacity. This amended guidance also defines the
specific roles of the Board, the Board’s risk committees, senior management and
control functions, including the CRO (chief risk officer) and the internal audit.
Another key emphasis is put on the strengthening of overall controls and bank
balances. A higher risk focus and a supportive management framework include
identifying the responsibilities of different parts of the organization for dealing with
and managing risk. The CG principles for banks include the following 13 principles:
(1) Board’s overall responsibilities, (2) Board qualifications and composition, (3)
Board’s structure and practices, (4) Senior management, (5) Governance of group
structures, (6) Risk management function, (7) Risk identification, monitoring and
controlling, (8) Risk communication, (9) Compliance, (10) Internal audit, (11)
Compensation, (12) Disclosure and transparency, (13) The role of supervisors.
5.3 Implementation of CG Principles of Banks into Slovak

National Legislation
Some of the OECD principles for CG as well as the Basel principles of CG for
banks were already part of the national legislation of the Slovak Republic at the
time of their codification. However, others were implemented into the legislation
consequently. Later, many of these legal norms have been amended, which has
resulted in a complicated mixture of norms, regulations and measures that are used
to govern companies in their administration and management (by their government).
Apparently, the principles of CG are extensively implemented in the Commercial
Code no. 513/1991 Collection of Laws. The Commercial Code is the primary legal
norm in Slovakia that regulates the business of joint-stock companies. In accordance
with the principles of the Act on Banks, a joint-stock company is the only legal form
that is permitted for banks in Slovakia to do their business. The Commercial Code
incorporates relevant amendments to the rights of shareholders to the management
and control of the company and also to their equal treatment. This Code also
regulates the rights of other stakeholders, related party transactions, disclosure
and transparency obligations, as well as the rights, duties and responsibilities of
the management bodies of joint-stock companies. The rights and obligations of
institutional investors and the rules for ensuring a credible financial market were
reflected in the amendment to Act No. 566/2001 Collection of Laws on Securities
and Investment Services; and in the Act 203/2011 Collection of Laws on collective
investments; as well as in Act no. 429/2002 Collection of Laws on the Stock
Exchange.
The implementation of selected principles of CG was also reflected in the Act
no. 483/2001 Collection of Laws on Banks. In Section 34 paragraph 5, this Act
regulates the obligation of securities managers, including banks mostly, to conduct
investment transactions only at a price and conditions favourable to the client, and
with professional care, unless otherwise stated in the client’s order or requirements.
Sections 23 and 24 of the Banking Act also regulate the rights and obligations
of the bank’s governing bodies and the organization of internal control and audit
processes to ensure compliance with binding legislation and the functionality and
effectiveness of the bank’s management and control system, as well as to ensure the
bank’s safety and health in order to increase the value of the bank’s shares or its
permanent profit. The prohibition of trading in confidential information is regulated
by Section 25 paragraph 3 of the Act on Banks. In addition to the prohibition on
misusing information acquired in connection with the performance of one’s duties
or a position to gain undue advantage to oneself or to another, this Section also
restricts the parallel functions in the exercise of which such misuse could occur.
The selected shareholders’ rights related to large ownership shares are regulated by
Section 28 of the Act on Banks.
Section 37 of the Act on Banks lists the information that banks are required
to disclose. These requirements are comparable to the OECD recommendations,
particularly in part V that is related to Disclosure and Transparency. Disclosure of
this information will be the subject of our further research.
5.4 Reporting of Recommended Information on CG in the

Annual Reports of Banks in Slovakia
In compliance with The OECD Principles, Part V. Disclosure and transparency, the
companies are requested to disclose the following information:
1. Audited financial statements (p1),
2. Information on financial performance and financial situation (p2),
3. Information on transactions of individual parts that form a company, contin-
gent liabilities and off-balance sheet transactions (p3),
4. Goals and objectives of the company (p4),
5. Non-financial information including business ethics (p5a), environmental
commitments (p5b) and social policy (p5c),
6. Significant ownership shares and information on entities with a significant
influence on the company’s control (p6a), information on share ownership by
members of the Board of Directors and members of the Supervisory Board (p6b),
7. Information on transactions with related parties, related parties’ transactions,
including the terms of such transactions and their incorporation by their severity and
conditions (p7),
8. A statement of remuneration in the company, including information on the
remuneration of members of the governing bodies and senior management (p8a)
and information on the connection between their remuneration and the long-term
performance of the company (p8b),
9. Information about the members of the company’s bodies (p9a), including their
qualifications, selection procedure and membership in other bodies and executive
functions (p9b), and a statement as to whether the company considers them to be
independent (p9c),
10. Foreseeable risk factors specific to the sector and location (p10),
11. Information concerning employees, i.e. relations between management and
employees, including remuneration (p11a), collective bargaining, employee repre-
sentation mechanisms (p11b) and other stakeholders (i.e. creditors, suppliers, local
communities) (p11c),
12. Information on the internal organization of bodies (p12a) and strategies in
the field of CG, including the content of the CG code (p12b), the procedure and
processes through which it is implemented (p12c); the statement should include
information on the division of powers between the shareholders, management and
members of the company’s bodies (p12d), as well as the individual functions and
competencies of the CEO and the Chairman of the Board of Directors (p12d),
13. Information about the audit of financial and non-financial reporting by an
independent, competent and qualified audit firm (p13),
14. Information about the audit committee or other committees that supervise the
internal audit activities and relations with the external auditor (p14),
15. Information about the channels through which the company disseminates
information in such a way as to ensure that its users have equal, timely and
affordable access to relevant information (p15).
When reporting information on CG, companies in Slovakia primarily follow the

provisions of relevant laws. The information they disclose in detail is thus consistent
with the information in the financial statements. Other pieces of information, which
are in the form of recommendations only, are provided through general statements
that are not basically specific enough in order to obtain a more accurate overview.
The same procedure is followed in the case of companies that operate in the banking
sector. The objective of our research is to find out to what extent the banks comply
with the recommendations on disclosure of information on CG that are set by the
OECD, the SACG, as well as the BCPB.
With regard to Section 20, paragraphs 6–8 on the Accounting Act, issuers of
securities are obliged to publish a Statement of Administration and Management,
which is available on the websites of the SACG and the BCPB. In this Statement,
companies are obliged to follow the “comply or explain” principle. In accordance
with this principle, they are expected to explain to what extent there is compliance
with the principles of these institutions, or otherwise explain the reasons for non-
compliance. According to the information available on the website of the Central
Register of Regulated Information and the website of the BCPB, the issuers of
securities that are actively traded on the regulated market of the BCPB as of 26 April
2020 are the following banks with the seat in the Slovakia (for bank abbreviation,
see footnote 1):
• Issuers of shares—OTP, Tatra bank and VÚB,
• Issuers of bonds—ČSOB, SLSP, Tatra bank and VÚB.
As aforementioned, all of these banks, with the exception of OTP bank, are
locally systemically important banks NBS Decision no. 4 of 26 May 2015.
Considering this, this is the main reason why we carry out the research in order
to find out how these banks publish the information on the administration and
management of companies. With regard to the branches of foreign banks that
operate on the Slovak market, there is only UniCredit, whose bonds are actively
traded on the regulated market of the Slovak Republic.
Furthermore, the content of published information of public interest entities,
including also banks and branches of foreign banks, is regulated by the Accounting
Act in Section 20 paragraphs 9–15.
The results of the survey on reporting information, which is set by the
G20/OECD CG Principles in Part V. Disclosure and transparency in banks with
the seat in the Slovak Republic and branches of foreign banks, are presented in
Table 1. A description of individual principles is provided in the text above. The
quality and scope of reporting information did not change between banks during the
years under review. Banks mostly copied information on corporate governance to
new annual reports from previous years. Year-on-year changes of the data in Table
1 are not relevant.
We have come to the following findings: there is the highest average number
of points in the case of reporting audited financial statements (p1) and related
information on the financial situation and performance of banks (p2), disclosure of
objectives (p4), ownership interests (p6a), transactions with related parties (p7) and
information on members of management bodies (p9a). In rare cases, banks report

information on the independence and ownership interests of members of the bodies
(p9c, p6b) and information on collective bargaining and employee representation
mechanisms (p11b).
The total value of CGDI(max) shows that the average quality and scope of
information reported by banks is 45.2%. In the case of individual principles, it is
42.9%. Systemic banks and issuers of securities report information on average at
58.9%, other banks on average at 41.4%. These results indicate that the systemic
banks and issuers of securities are aware of their legal obligations, and thus
disclose the information accurately and precisely. The average score of an individual
principle is 0.858 points. Since we rated the disclosure of information on a scale
from 0 to 2, this result indicates that the recommended information is published
quite generally by the banks. For the principles p1, p2, p3, p4, p5c, p6a, p7, p9a,
p12a, p13 and p15, there is a higher rating than the average per principle. This
means that the banks pay more attention to reporting these pieces of information in
comparison to their overall average.
The following banks received a higher than average rating1 : ČSOB, OTP, PB,
PSS, SLSP, VUB, J&T, KB, BFB, BKS and ING.
The order of reporting on CG principles was verified through the Friedman test
(H0 : μ0 = μ1 ; H1 : μ0
= μ1 ). The test result (χ 2 = 162.416; Sig. = 0.000) indicates
that at the significance level α = 0.05, there are differences in reporting of individual
principles, i.e. we reject the null hypothesis. According to Kendall’s coefficient of
concordance (W = 0.272, Sig. = 0.000), we can see a weak congruence in reporting
principles (H0 : W = 0; H1 : W
= 0). The results of the Wilcoxon Signed Ranks Test
are shown in Table 2. Reporting of the examined principles can be divided into three
statistically significant groups (α = 0.05). The first group consists of the principles
p1, p2, p4, p6a, p7, p9a, p5c, p9a, p5, and the principle p13. On the one hand, banks
most often report the information, which is recommended to report, in accordance
with these principles. On the other hand, we can see that the information according
to the principles of p3, p15, p12a, p10, p9b, p12b, p5b, p14, p5a, p12d, p11c, p12c,
p8a, p8b, p12e, p11a, p9c is reported less frequently and to a lesser extent. The
third statistically significant group of information consists of information on the
ownership shares of members of bodies (p6b) and on collective bargaining (p11b).
These are the pieces of information reported only exceptionally.
In this part of our paper, we will pay attention to reporting of information on CG
by both the banks that are systemically important for Slovakia as well as by issuers
of shares on the regulated market.
Firstly, we will verify the order of importance of banks with the seat in Slovakia.
In order to meet this objective, we gained the information on the amount of assets,
equity, sales, profit after tax, the volume of receivables from clients, the volume
of liabilities to clients from the annual reports within the years 2015–2019, and
at the same time we calculated the indicators of indebtedness, ROA, ROE and
ROS. We arranged this data in descending order for each bank (from the highest
to the lowest value). We indicated the statistics of the Friedman test (χ 2 = 303.815;
Sig. = 0.000) and Kendall’s coefficient of concordance (W = 0.690, Sig. = 0.000).
Table 2 Wilcoxon signed ranks test statistics

p1-p2 p2-p4 p4-p6a p6a-p7 p7-p9a p9a-p5c p5c-p13
Z −1.000b −.378c −1.508b .000d −1.732c −1.633b −1.342c
Sig.a .317 .705 .132 1.000 .083 .102 .180
p13-p3 p3-p15 p15-p12a p12a-p10 p10-p9b p9b-p12b p12b-p5b
Z −2.236b −.707c −.378c −1.000b −.707b .000d −1.000b
Sig.a .025 .480 .705 .317 .480 1.000 .317
p5b-p14 p14-p5a p5a-p12d p12d-p11c p11c-p12c p12c-p8a p8a-p8b
Z −1.134c −.816b −.333c −.447b .000d −.378b −.577b
Sig.a .257 .414 .739 .655 1.000 .705 .564
p8b-p12e p12e-p11a p11a-p9c p9c-p6b p6b-p11b
Z −.447c −1.134c −1.897b −2.000b −.378c
Sig.a .655 .257 .058 .046 .705
a Asymp. Sig. (two-tailed)
b Based on positive ranks
c Based on negative ranks
d The sum of negative ranks equals the sum of positive ranks
Table 3 Wilcoxon signed ranks test statistics

Post bank– PSS–Post
TB–SLSP VUB–TB ČSOB–VUB ČSOB bank
Z −4.300b −1.032b −1.464b −3.611b −2.282b
Sig.a .000 .302 .143 .000 .022
Prima–PSS Privat–Prima OTP–Privat ČSOB SS–OTP SZRB–ČSOB SSWüstenrot–SZRB
Z −2.861b −1.347b −.846b −1.179b −.108b −.128b
a
Sig. .004 .178 .398 .238 .914 .898
a Asymp. Sig. (two-tailed)
b Based on negative ranks; for bank abbreviation, see footnote 1
Through Wilcoxon test we determined the significant ranking of individual banks

in the period under our research. The results show that SLSP is the most significant
bank in the Slovak Republic, TB, VÚB and ČSOB belong to the second significant
group, then Post bank belongs to the third group according to its significance, and
PSS is the fourth, and finally, the fifth group includes other banks with their seats in
Slovakia, such as Prima bank, Privat bank, OTP, ČSOB SS, SZRB and Wüstenrot
(Table 3).
SLSP, VUB and TB are among the leaders of the Slovak banking market. This
fact has also been proved by Friedman and Wilcoxon tests, through which we
detected their ranking in the groups that are created in accordance with the particular
financial indicators which we examined.
Given the importance of systemic banks for the country’s economy, we want
to find out what information on CG is reported to a greater extent and detail by
these banks compared to nonsystemic banks. The basic set of 23 banks consists of 5
systemic banks and 18 other banking entities, including branches of foreign banks.
Table 4 Kruskal–Wallis test statisticsa

Mean rank—SIB 14.000 15.000 17.700 14.500 14.400 19.500 17.000
Mean rank—others 11.444 11.167 10.417 11.306 11.333 9.917 10.611
Chi-square 1.278 2.108 5.282 1.040 0.962 10.040 3.904
Asymp. sig. 0.258 0.146 0.022 0.308 0.327 0.002 0.048
Mean rank—SIB 13.800 10.500 17.000 13.400 13.800 12.400 14.800
Mean rank—others 11.500 12.417 10.611 11.611 11.500 11.889 11.222
Chi-square 0.569 0.917 4.392 0.340 0.592 0.027 1.275
Asymp. sig. 0.451 0.338 0.036 0.560 0.442 0.870 0.259
Mean rank—SIB 11.200 18.200 16.500 16.900 13.300 10.800 15.200
Mean rank—others 12.222 10.278 10.750 10.639 11.639 12.333 11.111
Chi-square 0.135 6.126 3.619 7.723 0.282 0.229 1.660
Asymp. sig. 0.713 0.013 0.057 0.005 0.595 0.632 0.198
Principles p12c p12d p12e p13 p14 p15
Mean rank—SIB 14.800 12.900 13.700 12.500 16.300 12.800
Mean rank—others 11.222 11.750 11.528 11.861 10.806 11.778
Chi-square 1.310 0.133 0.503 0.046 3.006 0.101
Asymp. sig. 0.252 0.715 0.478 0.831 0.083 0.751
a Grouping variable: SIB system important bank
The results of the Kruskal–Wallis test (H0 : μ0 = μ1 ; H1 : μ0

= μ1 ) are shown in
Table 4.
The results of Table 4 show that despite the low number of systemically important
banks in the sector, the mean rank values of reporting CG information are, except
for three cases (p6b, p9c, p12a), higher for other banks. Statistically significant
differences in reporting are identified through the p-value (Sig < 0.05). These
include the following indicators: group transactions (p3), environmental liabilities
(p5b), social policy (p5c), related party transactions (p7), industry and location
risk factors (p10) and collective bargaining (p11b). In all these cases, systemically
important banks achieve a higher mean rank value, which means that they report
and disclose this information to a statistically significantly higher and more detailed
extent in comparison with nonsystemic banks.
From a statistical point of view, the reporting of other information on CG cannot
be characterized as more extensive and detailed for any of the groups of banks (we
cannot reject the null hypothesis).
Due to the aforementioned strict regulation of the information disclosed by
issuers of securities admitted to the regulated market, we are subsequently interested
in the differences in the reporting of the examined information on CG between these
groups of banks. As of 26 April 2020, a total of six issuers of securities admitted
to trading on a regulated market are operating on the Slovak banking market, of
Table 5 Kruskal–Wallis test statisticsa

Mean rank—issuer 14.000 15.000 17.917 13.500 14.000 15.333 13.667
Mean rank—others 11.294 10.941 9.912 11.471 11.294 10.824 11.412
Chi-square 1.624 2.679 7.232 0.476 0.849 2.520 0.551
Asymp. sig. 0.203 0.102 0.007 0.490 0.357 0.112 0.458
Mean rank—issuer 14.33 10.50 17.00 12.33 11.25 12.08 14.33
Mean rank—others 11.18 12.53 10.24 11.88 12.26 11.97 11.18
Chi-square 1.215 1.165 5.581 .024 .131 .001 1.125
Asymp. sig. .270 .280 .018 .876 .718 .969 .289
Mean rank–issuer 12.42 16.33 16.50 13.83 12.17 11.08 16.08
Mean rank—others 11.85 10.47 10.41 11.35 11.94 12.32 10.56
Chi-square .047 3.802 4.598 1.374 .006 .170 3.434
Asymp. sig. .829 .051 .032 .241 .939 .680 .064
Principles p12c p12d p12e p13 p14 p15
Mean rank—issuer 15.83 14.92 14.17 12.50 14.50 11.42
Mean rank—others 10.65 10.97 11.24 11.82 11.12 12.21
Chi-square 3.119 1.777 1.038 .058 1.291 .068
Asymp. sig. .077 .183 .308 .810 .256 .794
a Grouping variable: issuer
which one is a branch of a foreign bank. However, we were unable to obtain its
annual reports, so this bank will be excluded from the file. Thus, information from
the annual reports of five issuers of securities and 17 banks that did not issue
securities on the Bratislava Stock Exchange have been taken into consideration and
are compared in our research (Table 5).
Statistically significant differences in reporting on information that is in compli-
ance with the principles of CG are identified through the Kruskal–Wallis test (H0 :
μ0 = μ1 ; H1 : μ0
= μ1 ) in the three areas: group transactions (p3), related party
transactions (p7) and management and employee relations (p11a). Taking the p-
value (Sig < 0.05) into consideration, we can reject the null hypothesis, and with
regard to the value of mean rank we can state that issuers of securities disclose
this information to a statistically significantly higher and more detailed extent. With
regard to reporting other information, we cannot prove the same fact since we cannot
reject the null hypothesis. This also applies to the information on ownership shares
of members of bodies (p6b), impact of remuneration to performance (p8b), internal
organization of bodies (p12a) and information channels (p15), where the mean rank
values of issuers are lower than non-issuers values, but the p-value is higher than
the selected level of significance (α = 0.05). Thus, despite the higher value in case
of non-issuers which results in the higher mean rank value, we cannot declare these
results statistically significant.
6 Conclusion
Currently, the concepts of corporate governance in companies draw attention of

hundreds of professionals as well as general public. Their research focuses primarily
on various aspects of governance and the determinants that are concerned. Our paper
focused on the principles of corporate governance since we examined the scope
and quality of the information which is reported on corporate governance by banks
operating on the Slovak financial market. Furthermore, we also examined the extent
of implementation of the G20/OECD recommendations, with an emphasis on the
principles of disclosure and transparency. We determined the order of published
information and subsequently compared the accuracy of the information published
by the systemic banks and issuers of securities admitted to the regulated market in
the Slovak Republic with other banks.
Through the research we came to the following findings: (1) the local systemi-
cally important banks that are designated by the NBS maintain a long-term leading
position on the Slovak financial market, (2) the systemic banks and issuers of listed
securities publish the information in their annual reports with higher accuracy and
more precisely, (3) the quality of published information is average, the examined
banks present the information mostly in a general form (average number of points
per 1 examined principle is 0.858; the value of the corporate governance index
is on average 42%, or 45%), (4) the information related to financial statements,
financial position and performance, objectives, ownership interests and related party
transactions is reported in the highest quality and in details by the banks.
Acknowledgements This paper has been supported by the Scientific Grant Agency of Slovak
Republic under project VEGA No. 1/0749/18 “Research on the application of CG principles in
companies in Slovakia”. The authors would like to express their gratitude to the Scientific Grant
Agency of The Ministry of Education, Science, Research and Sport of the Slovak Republic for
financial support of this research and publication.
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Implementation of Critical Reflection
Analysis in Teaching and Learning
Focused on Developing Critical Thinking
Skills
Lenka Theodoulides and Gabriela Nafoussi (Kormancová)
Abstract Traditional approaches in teaching and learning do not seem to be

satisfactory for students at higher education institution. They do not fully focus
on students’ improvement in the process of reality understanding, evaluating the
huge amount of data, making the decisions and taking the responsibility for their
behaviour. In order to foster those learning processes in formal education, the
development of the critical thinking skills became the biggest challenge for higher
education institutions (HEI). Critical thinking (CT) is one of the key competences
of a university-educated person. This cannot be achieved without changing the
perspective of what is the role of the teacher together with the implementation of
the teaching techniques which are fostering the critical thinking. Creation of the
new types of relationship between teacher and students has significant impact on
critical thinking. In this paper, preliminary results of the ongoing national research
project conducted at the Matej Bel University in Slovakia are presented. The current
level of the critical thinking skills among the students of various study programs
were tested. The main aim of this paper is to identify the processes of teaching and
learning with the elements of the critical thinking. The project research strategy and
methodology has been developed upon the implementation of the Critical Reflection
Analyses which assess and evaluates the observed processes as well as provides
a room for improvement. The new approach for teaching and learning in higher
education which enhance critical thinking skills of students is considered as the key
project outcome.
Keywords Critical reflection analysis · Critical thinking · higher education
JEL Classification: I23, J24
L. Theodoulides · G. Nafoussi (Kormancová) ()

Department of Corporate Economics and Management, Faculty of Economics, Matej Bel
University in Banská Bystrica, Banská Bystrica, Slovakia
e-mail: lenka.theodoulides@umb.sk; gabriela.nafousssi@umb.sk
https://doi.org/10.1007/978-3-030-63970-9_17
234 L. Theodoulides and G. Nafoussi (Kormancová)
1 Introduction
In the last years, the surveys below showed quite alarming situation about the
decreasing level of skills of university graduates in Slovakia.
According to the survey provided by Slovak centre of scientific and technical
information in 2015, where 2671 enterprises were involved, the negative perception
of graduates’ communication skills was identified (they struggle to express them-
selves in a coherent way or present themselves before a large audience). The young
graduates have quite serious problems to use their theoretical knowledge in the
business environment, and work autonomously. As the worst was evaluated their
ability of taking decision, assuming the responsibility and thinking strategically.
Ďad’o, Kormancová, Theodoulides, and Táborecká (2018) pointed out that the
collaboration between potential employers and educational institutions in Slovakia
seemed to be insufficient. HEI are lacking a practical focus in their education
process, thus performance of university graduates shows significant shortcomings in
using information and communication technologies, implementing marketing tools
as well as exhibiting their interpersonal and critical thinking skills on the satisfactory
level (Purg, Lalic, Pope, 2018).
In comparison with the Vančo’s survey from 2008, this type of skills is
considerably weaker. Moreover, current graduates struggle to implement theoretical
knowledge on the workplace and use them in real working situation (Vančo et al.,
2016).
In 2017, the European Commission introduced its vision for 2025 of a European
Education Area in which the free movement of learners is guaranteed with the
focus on common key competencies for lifelong learning, digital skills and common
values (European Commission, Higher education policy, 2017).
As a reaction to the current situation, the European Union in its education and
training policy aims that all students need to acquire advanced transversal skills
and key competences that will allow them to succeed after graduation (European
Commission, Higher education policy, 2017). These skills include high-level digital
competences, numeracy, critical thinking and problem-solving. There is also a
strong need for flexible, innovative teaching and learning techniques designed to
improve the effectiveness of education while creating more capacity for students in
higher education institutions (“HEI”).
As is stated in the Council of the European Union Recommendation of 22
May 2018 on key competences for lifelong learning, “In the knowledge economy,
memorisation of facts and procedures is key, but not enough for progress and
success. Skills, such as problem solving, critical thinking, ability to cooperate,
creativity, computational thinking, self-regulation are more essential than ever
before in our quickly changing society. They are the tools to make what has been
learned work in real time, in order to generate new ideas, new theories, new
products, and new knowledge”.
Critical thinking (CT) skills have been identified as the one of the most important
capabilities of university graduates by a number of employers. The critical thinking
Implementation of Critical Reflection Analysis in Teaching and Learning. . . 235
consists of evaluating what is really going on, searching for the best account to
be offered and being alert to the kind of reasoning that lies behind explanations,
theories and the scientific methods of investigating. One of the key features of the
critical thinking is to explore questions from a variety of intellectual perspectives.
Another one is to develop argument and variety of solutions.
Ciulla (1996) stated that there are two main goals to teaching critical thinking at
the higher education institution. The first is to develop analytical skills for finding
fallacies in arguments and to explore the nature of truth and validity (educating
the head). The second focuses on interpretive skills and the emotive content of
language (educating the heart). Students shall be able to read between the lines of
texts, become aware of their own biases, and the way in which these biases colour
their understanding of the world.
Students which are trained and constantly instructed to use various elements of
critical thinking become socially responsible, and they shall also be able to take a
responsibility for their decisions and actions. In this paper, the concept building
approach and the reflective approach were introduced as they both offer significant
contribution to examine critical thinking. The concept building approach is based
on examining those teaching and learning processes that are essential to develop
CT skills. The reflective approach represents the qualitative research strategy and is
performed by using critical reflection analysis. Based on the previous research, it is
argued that critical thinking skills are crucial to higher education, and the focus on
their development shall be everyday practice of each teacher.
2 Critical Thinking Skills and Reflection in Education

Process
Results of recent surveys mentioned above demonstrate that it is necessary to change

the approach of universities towards teaching process and students as well. The
traditional methods of teaching seem to be focused on memorizing; they are less
interactive, and do not force students to take responsibility for their behaviour.
Despite the importance conveyed by the education system about developing critical
thinking skills, effective efforts to put such skills into practice and to promote their
training have not been noticeable so far (Noddings, 2008). More complex thinking
skills are not covered by conventional teaching and assessment formats, which are
still too focused on data transmission, memorization of factual information and
subsequent evocation of knowledge in evaluation situations (Brady, 2008; Paul,
2005; Pithers & Soden, 2000).
In sum, we can accept that critically thinking is not an innate and intuitive
ability, spontaneously sprouted (Rivas & Saiz, 2010). On the contrary, it emerges
from the learning-teaching process, being gradually and deliberately acquired, and
assuming a previous and symbiotic mastery of a set of basic skills, such as reading
comprehension, argument analysis and production, or still, search for evidence to
stand for a particular point of view (Facione, 2010; van Gelder, 2005).
2.1 Concept Building Approach Defining the Purpose

of Critical Thinking in Higher Education
Critical thinking is now generally recognized as one of the essential generic skills
for developing a professional career as well as acting as a responsible citizen. It
has been assumed that both formal and informal education, from the early to the
university education, affect the level of mastering these skills. However, there are
two basic approaches to developing CT skills in education—one is promoting a
model where critical thinking skills are taught separately, the other claims that it
is more effective to integrate development of critical thinking skills into teaching
subject-specific knowledge and skills (Behar-Horenstein & Niu, 2011). In both
cases, though, it is necessary to understand the processes that constitute critical
thinking and enable students go through these processes to develop them (Lipman,
1988 in Behar-Horenstein & Niu, 2011).
Some of the tasks typically associated with the HEI business students’ critical
thinking focused on identifying problems, incorporating underlying assumptions,
using relevant data sources, problem-solving from various perspectives, generating
viable alternatives and comprehending the consequences of the suggested solutions.
In order to examine the teaching process and analyse how the critical thinking
is developed, the five key parameters were determined as essential to observe. They
were formulated as follows:
1. Students do not accept data and information automatically.
2. Students have doubts on what they read or what they are told.
3. Students suggest new solutions.
4. Students develop good arguments.
5. Students raise questions.
2.2 Reflective Approach Towards Development

and Improvement of Critical Thinking
The role of reflection is analysed by a number of scholars, and it is associated with

its development in different contexts. Kolb (1984) saw the reflection as an essential
element in experiential learning in the context of the cycle of the learning based
upon experience in Kolb’s work. On the contrary, in work of Bound, Keogh, and
Wolker (1985), the reflection was associated with the role of emotion. Reflection
plays also important role in professional development, and it has been important as
a subject of research (Moon, 1999).
Reflection is defined as a cognitive process in which people attempt to increase
their awareness of personal experiences and therefore their ability to learn from
them (Gray, 2007). Dualism in any reflection process has been identified by Anseel,
Lievens, and Schollaert (2009). They suggest that reflection as a dual process model
of information processing and the depth of elaboration of complex data influences

learning and behavioural outcomes.
During the process of education reflection interventions provided by teachers
are helping students to switch their mode of data, information and knowledge
processing from passive (automatic) to conscious that lead to critical thinking and
better learning. The reflection opens the door for effective information flow and
interactions which are inevitably important to build good relations based on trust.
Mutual understanding and trust between teacher and student are framed by both-
ways communication, exchange of information and giving–receiving feedback. This
is an ongoing interaction exchange which is composed under the reflection process.
Kolb’s learning cycle (1984) which emphasize the experience and practice was
modified in order to describe the key activities contributed to learning process based
upon the reflection.
The modified learning cycle involves four stages, namely exploring (searching
for ideas, changes and concepts), testing (experiments, modelling, practicing),
output (performance, change, experience) and reflection (observation, consideration
and assessment). Students reflect on the activity undertaken during the “reflection
phase”, and share their reactions in a structured way with other members of the
group. The teachers’ role as facilitator is very important during each phase of
the cycle. During the process phase, teachers should be prepared to help students
think critically about their experience and to help them verbalize their feelings and
perceptions. Additionally, teachers’ role is to help students to conceptualize their
reflections on the experience so that they can move towards clear conclusions.
3 Research Philosophy and Methodology
The paper aims to identify the process of teaching and learning with the elements
of the critical thinking. It will prove how the process of teaching impacts on
the learning and developing the critical thinking skills of students at the higher
education. It has been examined through three research assumptions which were
formulated as follows:
1. Traditional teaching and learning process in higher education is lacking the focus
on the development of the critical thinking.
2. The role of teacher is shifting from the directive mentorship towards the role of
facilitator, coach and study guide.
3. Development of the critical thinking skills of students depends on possessing
these skills by teachers and implement methods, techniques and tools focusing
on critical thinking development.
The assessment and evaluation of the findings were performed as the first stage
of the ongoing research project conducted in Slovakia. The results reflect the current
level of UMB students’ critical thinking and proposals on how their critical thinking
can be developed. The project (KEGA 018UMB-4/2018 titled “Coaching approach
Fig. 1 Research
methodology. Source authors Research aims
Research strategy Research questions
Target group:
UMB teachers
Research design
Interviews
(feedback from
Data collection teachers, best
practices)
Observation
Questionaire
CRA – Critical
reflctive analysis
Data analysis 1/ Reflection:
techniques teacher vs.observer
2/ Reflection:
Students vs.
Observers
as a new form of critical thinking development of students in higher education”) has

been conducted between 2018 and 2020 and its research design consists of several
steps as it is shown in Fig. 1.
The target group consists of 17 different teachers on both undergraduate and
graduate level and represents all academic disciplines at Matej Bel University:
natural science, social and economic science, law and humanity science. The
selected teachers were observed performing particular teaching activity (e.g. semi-
nars, lectures, consultancies).
The research outcome resulted in formulating the key steps and set of recom-
mendations for teachers what is necessary to do in order to develop students’ critical
thinking skills.
In the first step (November 2018–April 2019), 17 observations of teachers’
classes were provided using the Critical Reflective Analysis (CRA), described in
detail below. To increase the objectivity of the research, one-to-one interviews with
participating teachers after each observation were arranged. The purpose of this was
to evaluate together with an observer the students’ performance, at the same time,
to have a feedback from teachers. Additionally, it was used for collecting the best
practices of researched participants.
In the second step (April 2019), an additional questionnaire has been designed
to reflect the partial results of the previous step of the research. The aim of this
survey was to identify the reasons why students are afraid to ask questions and
actively participate in seminars. For this purpose, eight questions were formulated
(to identify the barriers hindering them to ask questions). Finally, 116 participants
were involved (83.6% of women; 16.4% of men), students at bachelor level, study
program Business Economics and Management, at Matej Bel University, Faculty of
Economics.
3.1 Implementation of the Critical Reflection Analysis
The original framework of the Critical Reflective Analysis (CRA) has been devel-
oped in 2013 as the Reflection Method (ReMe) by Lena Theodoulides and Peter
Jahn, from the Matej Bel University. Since that it was used to assess and evaluate
different processes in several companies in Slovakia. The obtained results have
been examined, and they provided important base for further improvements. The
processes of reflecting and formulating improvements were conducted between
managers and their followers and thus it increases the organizational performance
as well as the performance of the individuals. The successful results of Reflection
Method in the business world have encouraged us to test the method further. It was
implemented in researching how leaders reflect on the importance of “complexity,
system view, process of feedback, sharing information and knowledge” in their
leadership actions. The method has been enriched by three core processes of
learning, critical thinking and reflection that contribute to the construction of the
critical reflection analysis (Theodoulides, Kormancova, & Cole, 2019).
Critical reflection analysis (CRA) is the method that offers possibilities for
identifying the key processes or parameters that can be observed, evaluated and
assessed. CRA is considered as the broad method that can be utilized and generally
applied for monitoring of any social process for instance teaching and learning.
Its aim is to offer a solution and to provide quantitative measurements as well as
the qualitative evaluation of social processes which might be difficult to measure.
Therefore, critical reflection analysis is characterized as mainly qualitative method,
but it is performed by using evaluation scales and ranges that are expressed in
quantitative measures. The obtained results provide the important evidence for
further discussion and improvements.
3.1.1 Selection of Variables
The selection of variables is the starting step in the process of implementation of

critical reflection analysis. Its main aim is to figure out variables or factors that
make a significant influence on the observed phenomena. The conceptual approach
described on previous chapter highlighted five key parameters of the critical thinking
which are essential to develop and maintain during higher education.
3.1.2 Assigning the Weights of Variables
Selected variables/parameters which are essential for critical thinking have different
priority or level of influence. In order to distinguish from the most influential
variable up to those with the least priority, the weighting scale from 1 to 10 is
suggested. The range is set up within three levels as follows:
(a) Significant impact (weighting from 8 to 10)—parameters strongly influence the
process, they represent the key performing criteria, greatest expected results or
has the highest priority for the researched phenomena.
(b) Standard impact: (weighting from 4 to 7)—parameters have standard, regular
influence on the examined processes. They constantly exist in observed topic
and their relevance depends on the certain conditions, circumstances or current
situation in specific period.
(c) Additional impact: (weighting from 1 to 3)—parameters have only substi-
tutional influence on evaluated process. They usually appear as additional
parameters to those fundamental ones or in certain crisis situations.
As it is shown in Table 2 the highest weight was given to the variable “student
propose new solutions”. Referring to the concept building approach and theory
related to critical thinking, this parameter is the most difficult to perform and
requires consistent training of critical thinking skills.
The variable “student do not accept data and information automatically” has been
assigned with the lowest weight as it is considered to be the most fundamental
feature of critical thinking and should be practice at the beginning of the process
of developing critical thinking skills.
From the studied theory and practical trainings conducted in the field of critical
thinking, there can be few other parameters proposed to observe. There is no
constant number of variables suggested because it depends on the several conditions
for instance on the number of observed processes, depth of the analysis or novelty
of the observed phenomena.
3.1.3 Reflective Assessment and Evaluation of the Variables
The process of assessment and evaluation begin by creation of reflective table

which consists of five zones. These zones are constant as well as the scaling.
Table 1 presents measurements from 1 to 99 and qualitative evaluation of the
researched variables. The outcomes and qualitative evaluation of the variables are
formulated always differently depending on the expected performance and level of
the variables/parameters/or observed processes.
However, in education process, the assessment and evaluation of the students’
performance always varies. The focus on the critical thinking is crucial to structure
in both quantitative and qualitative forms. The expected results shall be described
in more specific comments and linked them with the scaling range. It is not
necessary to structure the scaling and detailed qualitative comments as it is
Table 1 Reflective assessment and evaluation table

Expected outcomes and
qualitative evaluation of
Zone (verbal evaluation) Scaling Point range observed variables
Very bad (extremely poor 1–29 1–9 Results do not correspond with
results, serious mistakes and goals, expectations and
weaknesses, standards only requirements
formally fulfilled)
10–19 Extremely small signs of
expected performance which
lead to completing required
parameter
20–29 Limited results and small attempt
to fulfil the goals and prospects
appeared
Bad (still poor results, mistakes 30–44 30–34 Rather formal expressions of
and weaknesses exists, positive completing the proposed
sign of standards occurred) goals/criteria
35–39 Attempts of the meaningful
activities which might reach the
expected results
40–44 Signs of fulfilment of the
expectations in the line of formal
and practical compliance.
Results remain with significant
limitations
Zone of indecision (acceptable 45–54 45–48 Expressions of the expected
expressions, standards completed results oscillate between formal
partially, more evidence and real compliance. In their
occurred) completion an evaluation with
positive results occurred
49–51 Expressions of the expected
results oscillate between formal
and real compliance. In their
overall evaluation positive signs
dominated
52–54 Fulfilment of criteria is in
progress. In responses to
observed activity positive
evaluation dominated
Good (sticking to the standards, 55–79 55–62 Completion of parameter
set of expectations are fulfilled in oscillates around the line of
satisfactory level, positive standard expectations and
achievements) appears on the satisfactory level
63–71 Completion of the parameter
oscillates above the line of set of
standards. Positive achievements
are recognized
(continued)
Table 1 (continued)
Expected outcomes and
qualitative evaluation of
Zone (verbal evaluation) Scaling Point range observed variables
72–79 Completion of the parameter
oscillates above the line of set of
standards and shows its
permanent potential for
improvement
Very good (standards are 80–99 80–86 Achieving the expectations
exceeded, excellent performance reaches permanent superior level
beyond expectations) and shows efforts for excellent
results
87–92 Achieving the expectations
reaches high level of standards
and shows excellent results
93–99 Fulfilment of the parameter
highly and permanently exceeds
the standards as a result of which
is setting the new criteria, goals,
requirements and expectations
Source: Authors based on Theodoulides and Jahn (2013)
presented in Table 1. However, more detailed description of the expected results

in the qualitative (verbal) form is required. Additionally, the alignment with the
measurable assessment in a form of scaling or numerical points begins to establish
a base for the reflection and feedback process which are essential elements of the
critical thinking skills.
3.2 Presentation of Results
The standard values of the researched parameters have been identified after the
completion of the conceptual phase, and they refer to the outcomes of the current
situation analysis. They were determined before class observations were conducted.
Target values of the parameters represent the long-term objectives of the research
team. There are more class observations planned in the near future. At the same
time, the launching of training material is in the process. Finally, a few feedback
sessions with the teachers involved will be organized regularly. The score evaluated
by the observer is compared with the standard and target values. The existing gaps
provide important information for the further improvement and possible change in
the process of teaching.
Observations of the academic sessions of the target group and the assessment
based upon the critical reflection analysis were conducted by two research fellows.
After the observation, each teacher reflected the parameters by himself/herself also
Table 2 Research results based on the critical reflection analysis

Critical thinking Weight Observer’s Teacher Standard Target value
parameter/variable assessment self- value
reflection
(average)
Students do not 6 38 53 68 88
accept data and
information
automatically
students present doubts 7 25 35 52 68
on what they read or
what they are told
Students propose new 10 22 46 45 72
solutions
Students develop good 9 41 54 65 85
arguments
Students raise 8 25 41 68 78
questions
Source: Authors
by using CRA. After these two independent observations, the feedback discussion
between the observer and teacher took place.
The presented results in Table 2 show that all parameters assessed by observers
and each teacher scored significantly lower than the standard as well as the target
values. Moreover, the assessment scores of all parameters conducted by observer
were assessed lower than teachers’ self-reflection scores.
The lowest level measured by an observer was in the parameter “students
propose new solutions”. This ability is the most difficult to develop in the academic
environment. On the one hand, the measured parameter “25” requires the focus on
critical and creative thinking that is associated with the invention and innovation. On
the other hand, the teacher’s assessment of this parameter was 46 which might be
explained by different perceptions and expectations of this parameter by teachers.
Moreover, the same second lowest score 25 measured by observers was given to
the two parameters “students present their doubts on what they read or what they are
told” and “students are raising questions”. The measurements conducted by teachers
were the lowest in the parameter “students present their doubts on what they read or
what they are told” with scores on average 35, and the second lower score got the
parameter “students are raising questions” with average 41 points.
The findings presented in Table 2 and conducted feedback sessions highlighted
some dilemmas and challenges that teachers are recently facing. Apparently, it is
expected that teachers themselves understand the fundamental concept of critical
thinking. Additionally, they are expected to be able to use various techniques in their
teaching activities in order to enhance the critical thinking of their students. But it
seemed to be a big challenge for a lot of teachers to accept the critical thinking as
a part of their teaching strategy. Similarly, they need to get familiar with the key
techniques, for instance, how to analyse the data and recognize fallacies, how to
develop a good argument and finally asking the right questions.
The conducted reflection on teaching approach and process of learning is not an
easy approach to perform. The main reason for significant differences in evaluating
parameters of the students’ critical thinking skills can be explained by Moon’s
(1999) definition of the reflection as “form of mental processing with a purpose
and/or anticipated outcome that is applied to relatively complex or unstructured
ideas for which there is not an obvious solution”. Even though the critical reflection
analysis provided a structure of observed parameters and specific measurements,
the teachers’ approach towards developing critical thinking skills of their students
remains rather subjective. Through the feedback discussions the process of our own
(teachers) teaching and learning was considered as a process of metacognition. Each
teacher from the research team critically reviews own behaviour during teaching
process (style of communication and building relationships with students), the
product of the teaching (essay, presentation, discussion or case study) and his or
her engagement in self-development in critical thinking. Teachers may not be clear
about the fact that critical thinking is a process and the necessity to build a strategy
to satisfy those specific aims—five parameters (mentioned in Table 2).
The results obtained by the implementation of the CRA, as a research method,
can support the assumption that reflection is necessary to be implemented in the
teaching and learning process. Furthermore, the reflection can develop the critical
thinking and also contributes to the personal development.
The relevance of the obtained results by critical reflection analysis has been
justified by two types of information, i.e. quantitative data and verbal explanation.
The comparison with the planned standard and target values generated many
recommendations on how to improve teaching process in order to develop the
critical thinking of students.
Consequently, teachers who are the enthusiastic advocates of reflective tools
and techniques (essay, journal writing, service learning, etc.) will practice critical
thinking more effectively than those colleagues who do not apply reflection in their
professional work.
Educators frequently acknowledge that good students ask good questions (Gavett
et al., 2007). Formulate a good question is rather hard not only for students (as was
confirmed by our results) but also for teachers. At the same time, asking questions
support the students’ critical thinking.
Another part of the research aimed to identify the reasons why surveyed
students do not ask questions.
Based on the results from questionnaire (described above), 19.8% of respondents
have never asked directly a question to his/her teacher. On the one hand, some of
the reasons were quite obvious, e.g. not to study enough before a lecture/seminar
(60.3%). On the other hand, some were quite surprising. Almost one-half of students
(45.7%) are afraid to say something inappropriate before their classmates which
consequently might be quite embarrassing for them. They often find their group
in the class too big to say something relevant (32.8%). Additionally, they expect
to be asked directly, and they are not willing to start the discussion themselves
(15.5%). These results indicate that the first research assumption can be confirmed.
It was stated that the traditional teaching and learning process in higher education is
lacking the focus on the development of the critical thinking. At the same time, it is
necessary to acknowledge that the development of the critical thinking skills at the
university level is quite challenging if they were not developed in a sufficient way
in the primary and secondary education.
In the other part of the survey, students explained the situations when they would
present their own opinion more willingly. One-half of them mentioned the use of
more appropriate form of teaching. About one-quarter of them prefer to have more
space to express themselves, given by their teachers or given by their classmates
(19.8%). From these results, it is quite evident that the majority of students desire
to have more interaction in the teaching process.
This was quite a valuable piece of information which can help teachers to
improve their teaching approach towards students in the future. This study has some
limitations, e.g. the sample of students surveyed, who were just from one university.
However, efforts were made to ensure that the results presented are accurate and
complete as possible.
The both steps of the research provided are complementary. In the first step, the
behaviour of students to teachers’ performance was observed. In the second step,
the reasons for this behaviour were analysed. This helped teachers to understand
how students perceive their approach to teaching.
Additionally, the significant research findings have been formulated and were
shared among participating scholars and other colleagues interested in developing
CT skills among their students. The exchange of research results and pedagogical
experience can consequently support less experienced counterparts in the researched
topic. The most crucial ones are as follows:
(a) There is a precondition that only teachers possessing critical thinking skills are
able to form critical thinking skills of their students.
(b) The constant dialogue and exchange of different views between academics and
students are essential for teaching and learning.
(c) The creation and maintenance of informal and friendly atmosphere help to
establish the trust which overcomes the biases and fear to raise questions, argue
and/or participate in debate in the classroom.
(d) The processes of reflection, self-reflection and feedback have significant impact
on both teachers’ and students’ development of the critical thinking skills.
The research results will be summarised once the project will be finished and
presented via e-learning Moodle system and open access platform. This is one of
the possibilities how the research outcomes will be shared and disseminated.
4 Conclusion
The main aim of this paper is to identify the process of teaching and learning with
the elements of the critical thinking. In order to develop the critical thinking among
students in HEI, the change in teaching and learning is crucial. Apparently, the
role of teachers is gradually changing. They become more facilitators and study
guides with the constant questioning and debating on everything rather than the
directive mentors who present their opinion as the “only truth” (as was accepted in
the past). The arguing, requesting of an evidence, reasoning, verifying and justifying
everything shall become a key component of every lecture, seminar or discussion.
The improvement of critical thinking skills of students in HEI can be done by
implementation of those techniques and tools which are focused on the critical
thinking, for example essays, journals, case studies, storytelling, service learning
and debates.
The development of critical thinking skills among students is feasible by those
teachers who themselves recognise the importance of these skills. It requires
teachers’ acknowledgement that critical thinking has become part of their private
and professional life. Thus, it creates an environment where implementation of the
critical thinking is the highest priority for every teacher and for HEI. Finally, there
is a vast number of studies focusing on students’ critical thinking skills. On the
contrary, the teachers’ critical skills are not in the centre of interest of researchers.
It might be a subject of the future research.
Acknowledgements The Grant Agency KEGA supported this research, project KEGA 018UMB-
4/2018 Coaching approach as a new form of critical thinking development of students in higher
education.
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data/att/10091.pdf
Comparison of Methods of Poverty Rates
Measurement
Anna Saczewska-Piotrowska
˛
Abstract There is a lot of poverty lines used in the world. Commonly lines
employed to determine the level of global poverty are the World Bank’s poverty
lines. This institution used in the past one international poverty line ($1 from
1990 and $1.25 from 2008 to 2014), but now the World Bank employs a few
poverty lines to adapt them to income situation in the countries. There are used
$1.9, $3.2 and $5.5 lines. Calculations of the percentage of poor people (so-called
poverty rate) using these three lines give different results. Besides, each country
employs its own line (so-called national lines) to determine the poverty rate in own
country. To assess the agreement between international and national methods of
measurement of poverty rates, Bland-Altman plots and Passing-Bablok regression
were applied. The data about poverty rates in 102 countries were used in the study.
The analysis was conducted for all countries and in groups of countries according to
their income situation (low-income, lower-middle-income, upper-middle-income,
and high-income countries). The analysis was preceded by an assessment of the
strength of association between income group and poverty prevalence (Cramer’s
V), and of the degree of correlation between national and international poverty rates
(Spearman’s rank correlation). The study showed that national and international
poverty lines are not substitutes and give different information about the poverty
level. International poverty lines give information about global poverty, but they do
not include regional specificity which is incorporated in national poverty lines.
Keywords National poverty rates · International poverty rates · Agreement of

methods
JEL codes: I32, C12, C13
A. Saczewska-Piotrowska
˛ ( )
Department of Labour Market Forecasting and Analysis, University of Economics in Katowice,
Katowice, Poland
e-mail: anna.saczewska-piotrowska@ue.katowice.pl
https://doi.org/10.1007/978-3-030-63970-9_18
250 A. Sa̧czewska-Piotrowska
1 Introduction
The methods of measurement of poverty may vary in different countries. The

starting point for the adoption of a given method is to choose a specific definition
of poverty. There is no universal method of defining and measuring poverty. All
poverty definitions can be divided into three categories (Hagenaars & de Vos,
1988). The first category includes definitions according to which poverty is “having
less than an objectively defined, absolute minimum.” The second group includes
definitions according to which poverty is “having less than others in society.” In
the third group, there are definitions according to poverty “is feeling you do not
have enough to get along.” The first category includes, inter alia, definitions: basic
needs approach used by Booth (1892), Rowntree (1901), Orshansky (1965), and
food/income ratio definition used by Watts (1967), Love and Oja (1977). Relative
deprivation with respect to various commodities proposed by Townsend (1979) is
an example of a definition from the second category. Definitions from the last group
have been developed by Goedhart, Halberstadt, Kapteyn, et al. (1977). According
to the first category the poverty is absolute, according to the second category it
is relative, and according to the third category absolute, relative, or something
between. Another difference between the groups is that the first and second category
defines poverty as an objective situation, and the third category as a subjective
situation.
The poverty may be analyzed as a unidimensional phenomenon (usually the
choice between expenditure or income as an indicator of welfare, discussion about
indicator presented in many publications, e.g., Hagenaars, Vos, & Zaidi, 1994) or
multidimensional phenomenon (newer approach described by Sen (1997), Nolan
and Whelan (2007), Alkire and Santos (2014)). Due to the availability of the data, a
one-dimensional approach is usually chosen.
It should be mentioned that the choice of definition of poverty is one of many
decisions to be made in measuring poverty. The other choices are related to, inter
alia, equivalence scale, measurement unit, measure of central tendency, poverty
line. A comprehensive description of the methodology of defining and measuring
poverty is presented in the literature, e.g., Atkinson, Cantillon, Marlier, et al. (2002),
Haughton and Khandker (2009). Adopting a specific definition of poverty and
making other decisions about measuring poverty result in different estimates of the
percentage of the population whose income (or expenditure) falls below a poverty
line. This percentage of the poor population is the most popular poverty measure and
is known as the poverty headcount ratio (or poverty rate or incidence of poverty).
International institutions use different poverty lines. Eurostat—statistical office
of the European Union (EU)—uses a relative poverty measure set at “60% of the
national median equivalised disposable income after social transfers” (Eurostat,
2018). The Organisation for Economic Co-operation and Development (OECD) also
uses a relative measure which is set at “50% the median household income of the
total population” (OECD, 2020). The World Bank uses an absolute poverty line.
Original dollar-a-day line (Ravallion, Datt, & van de Walle, 1991) was based on
Comparison of Methods of Poverty Rates Measurement 251
six of the lowest national lines from 33 national poverty lines in the database—the
common value of these six countries is about one US dollar (in 1985 Purchasing
Power Parity—PPP). This line was used for the first time in the 1990 World
Development Report (The World Bank, 1990). The updated dollar-a-day line (in
1993 PPP) was based on the median value of the ten lowest lines from the same
database (Chen & Ravallion, 2001). The exact value was $1.08 a day. The next
update (Ravallion, Chen, & Prem, 2009) was based on data from 74 countries,
and the poverty line was calculated as the average value of the national poverty
lines—the value was $1.25 a day in 2005 PPP and was used from 2008 to 2014.
The latest update is a simple average of national poverty lines (the same database of
74 countries) and is set at $1.9 a day in 2011 PPP (Jolliffe & Prydz, 2015; Ferreira,
Chen, Dabalen, et al., 2016; Jolliffe & Prydz, 2016; The World Bank, 2020b). This
is an extreme poverty line for low-income countries. Additionally, there were set
the lines for lower-middle-income countries ($3.2 a day in 2011 PPP) and upper-
middle-income countries ($5.5 a day in 2011 PPP). Detailed information about
income groups is set in the next section.
Countries use own poverty lines and therefore there is a difference between
poverty rates calculated based on international and national poverty lines. Corre-
lation between national and international poverty rates was studied by Gentilini
and Sumner (2012), Greenstein, Gentilini, and Sumner (2014), and Wagle (2019).
However, the existence of a correlation does not provide information on the
comparability of methods used. This study aimed to assess the agreement between
methods of calculation of poverty rates: international (used by the World Bank) and
national. The analysis was conducted for all countries and in groups of countries
according to their income situation.
2 Materials and Methods
Data source The study was conducted based on data from the World Bank’s
database (World Bank, 2020a). The data are mostly from 2015 to 2017, but in some
cases, there were used data from earlier years (the oldest poverty rates are from
2011). In the analysis, there were included 102 countries divided into four income
groups: low-income, lower-middle-income, upper-middle-income, and high-income
groups according to gross national income (GNI) per capita (World Bank, 2020c).
The condition that had to be met was the full information about all analyzed poverty
rates: measured with national and international poverty lines ($1.9, $3.2, $5.5). The
list of countries and the definition of income categories are presented in Table 1.
The spatial differentiation of income groups is presented in Fig. 1. It can be
seen that in a dataset the majority of high-income countries are from Europe (the
exceptions are Chile, Panama, Uruguay, and Seychelles), and almost all countries
in the low-income group are from Sub-Saharan Africa (the exceptions: Haiti,
Tajikistan, Yemen). The lower-middle and upper-middle-income groups consist
Table 1 Country classification by income group

Number of countries
Income group GNI per capita, U.S. dollars (Atlas method) Overall Included in the study
Low 1025 or less 37 20
Lower-middle 1026–3995 47 33
Upper-middle 3996–12,375 60 36
High income 12,376 or more 80 13
Fig. 1 The analyzed countries according to their income groups. Source: Own processing
of countries from different continents, and there is no spatial pattern in group

compositions.
Statistical analysis The Cramer’s V was used to show the relationships between
income groups of the country (low, lower-middle, upper-middle, high) and poverty
prevalence. Due to large sample size, commonly used chi-square test was not
appropriate in the analysis because in very large samples p-values go quickly to zero
(Kim, 2017; Leon-Guerrero & Frankfort-Nachmias, 2014; Lin, Lucas Jr, & Shmueli,
2013). There was used interpreting the meaning of Cramer’s V was interpreted
according to Rea and Parker (2014).
To measure the strength of association between national and international poverty
rates nonparametric tests were used (after testing for normal distribution by Shapiro-
Wilk test) and Spearman’s rank correlations rS were calculated.
Table 2 Poverty distribution by income groups

Poor (in million)
Number of National
Income analyzed Population poverty
group countries (in million) lines $1.9 line $3.2 line $5.5 line
Low 20 376.89 176.45 197.92 288.78 343.77
Lower- 33 2396.24 515.49 364.30 1108.90 1777.47
middle
Upper 36 2227.61 272.65 31.76 160.06 548.52
middle
High 13 102.32 15.03 0.58 1.24 3.96
Total 102 5103.06 979.62 594.56 1558.98 2673.72
To assess the agreement between methods of measurement of poverty rates, the

techniques commonly used in medicine and chemistry were applied: Bland-Altman
plots and Passing-Bablok regression. In the Bland-Altman plot, the differences
between the two methods are plotted against the averages of the two methods (Bland
& Altman, 1986, 1999). Horizontal lines are drawn at the mean difference and at
the limits of agreement, which are defined as the mean difference ±1.96 times the
standard deviation of the differences. The Passing-Bablok regression to detect the
systematic difference and the proportional difference between methods was used
(Passing & Bablok, 1983).
All calculations and plots (Bland-Altman and Passing-Bablok results) were
performed with Statistica; the cartogram was performed with MS Excel.
3 Results
Conducted analysis showed that almost 980 million people live in poverty defined
according to the national lines (Table 2). Measuring poverty with the international
poverty lines, there are from 600 million ($1.9 line) to 2680 million ($5.5 line) poor
people in the analyzed 102 countries.
The prevalence of poverty is varied in income groups (Table 3). According to
the national poverty lines, there are between 12.24% (in the upper-middle-income
group) and 46.82% (in the low-income group) poor people. It should be noted
that poverty prevalence in the high-income group is higher than in the upper-
middle-income group. Association between income group and poverty prevalence
is statistically significant, and this relationship is moderate (Cramer’s V = 0.228).
Considering international poverty lines, the prevalence of poverty is significantly
associated with income group (Tables 4, 5, and 6). The higher is the poverty line, the
stronger is this relationship (Cramer’s V from 0.415 to 0.537). It is clearly seen that
the higher the poverty rates the poorer the countries are. According to a $1.9 line
Table 3 Poverty prevalence Status (%)

in income groups according
Income group Poor Nonpoor Cramer’s V p-value
to the national poverty lines
(%) Low 46.82 53.18 0.228 <0.001
Lower-middle 21.51 78.49
Upper-middle 12.24 87.76
High 14.69 85.31

to the international poverty
line $1.9 (%) Low 52.51 47.49 0.415 <0.001
High 0.57 99.43

line $3.2 (%) Low 76.62 23.38 0.499 <0.001
High 1.21 98.79

line $5.5 (%) Low 91.21 8.79 0.537 <0.001
High 3.87 96.13
poverty rate in the low-income group is 52.51%, and in the high-income group it is
only 0.57%. The difference is higher between poverty rates calculated according to
$3.2 line—76.62% and 1.21% in low-income and high-income groups, respectively.
The highest difference is in the case of a $5.5 line—91.21% of people from the low-
income group are poor, and only 3.87% of people from the high-income group are
below $5.5. line.
This preliminary analysis suggests that there is no agreement between inter-
national and national methods of measurement of poverty rates because poverty
prevalence according to the national lines are not as strongly associated with income
group as international poverty lines.
In order to analyze the agreement between methods of measurement of poverty
rates, the Bland-Altman plots and Passing-Bablok regression were performed
60 100
+1.96SD (44.16)
y = -10.5819+0.7556x
50 p=0.0035
80 rS=0.762*
Difference between national and $1.9
40
30 60
Mean (13.79)
20
40
$1.9
10
0 20
-1.96SD (-16.59)
-10
0
-20
-30 -20
-40
-10 0 10 20 30 40 50 60 70 80 -40
-10 0 10 20 30 40 50 60 70 80
Average of national and $1.9 National
(a) (b)
60 120
+1.96SD (41.74) y=-21.2157+1.6501x
p=0.0035
100
rs=0.725*
40
80
20 60
Mean (0.8206)
40
$3.2
0
20
-20 0
-1.96SD (-40.10)
-20
-40
-40
-60 -60
-10 0 10 20 30 40 50 60 70 80 90 -10 0 10 20 30 40 50 60 70 80
(c) (d)
180
+1.96SD (32.35)
y =-21.3532+2.2328x
40 160 p=0.0728
140 rs=0.668*
20 120
100
0
Mean (-16.69)
80
$5.5
60
-20
40
20
-40
0
-1.96SD (-65.73)
-60 -20
-40
-80 -60
-10 0 10 20 30 40 50 60 70 80 90 -10 0 10 20 30 40 50 60 70 80
(e) (f)
Fig. 2 Bland-Altman and Passing-Bablok regression plots. (a), (c), and (e): middle line is the
mean difference, bottom and top lines are limits of the agreement; (b), (d), (f): solid line is the
regression curve, dashed line x = y is equivalence. Source: Own processing
(Fig. 2). International poverty rates ($1.9, $3.2, $5.5) were compared with national
poverty rates that were considered the reference method. In Bland-Altman plot,
the mean difference between national and $1.9 poverty rates was 13.79 percentage
points and the limits of agreement ranged from −16.59 to 44.16 (Fig. 2a).
Considering the overall population, in all analyzed countries the correlation between
national and international poverty rates (Fig. 2b) was positive and relatively high
(rS = 0.762, p < 0.05). However, according to the Passing-Bablok regression,
there were an intense both proportional and systematic differences: results were
approximately 25% lower with $1.9 line than with national lines (proportional
difference), and the difference between national and poverty rate $1.9 is more than
10.5 percentage points (systematic difference). Cusum test p-value less than 0.05
(p = 0.0035) indicates a significant difference from linearity, i.e., results of the
Passing-Bablok regression should not be used.
Considering national and $3.2 poverty rates, the mean difference was 0.8206
percentage points with the limits of agreement ranged from −40.10 to 41.74 (Fig.
2c) Correlation between two methods was positively high (rS = 0.725, p < 0.05),
but there were huge differences both proportional and systematic (Fig. 2d). Cusum
test for linearity with a p-value less than 0.05 (p = 0.0035) indicates significant
deviation from linearity, and results of the Passing-Bablok regression should not be
used.
When the difference between national and $5.5 poverty rates was compared, the
mean difference was −16.69 percentage points, and the limits of agreement ranged
from −65.73 to 32.35 (Fig. 2e). The correlation between these two methods (Fig.
2f) was less than in two previous cases but was also positive and relatively high
(rS = 0.668, p < 0.05). Results of the Passing-Bablok regression show that there
were huge proportional (21.35% percentage points) and systematic ($5.5 poverty
rates were more than two times higher than national poverty rates) differences.
Cusum test for linearity with a p-value higher than 0.05 (p = 0.0728) indicates
no significant deviation from linearity, and results of the Passing-Bablok regression
may be used.
Considering the groups of countries according to the income measured by GNI
per capita (low, lower-middle, upper-middle, and high-income group), the analysis
of the agreement was also performed. The results of the Bland-Altman analysis are
presented in Table 7.
The values of mean difference vary in income groups. The mean difference
between national and $1.9 poverty rates is positive, but the widest range of limits of
agreement is in low-income group and the shortest range in the high-income group.
In other cases, the shortest range of limits of agreement is also in the high-income
group. Besides, while in low and lower-income groups the mean difference between
national and international ($3.2 and $5.5) poverty rates is definitely negative, in
upper-middle and high-income this difference takes small negative or quite clear
positive values (−3.64 and 13.31, respectively). Generally, it can be seen that in all
cases the mean differences in the high-income group were positive, i.e., national
poverty rates had higher values than international poverty rates.
The correlation between international and national poverty rates in the low-
middle group was not significant (Table 8). In other groups the correlation between
international and national poverty rates was significant, the strongest correlation
Table 7 Difference of the size estimates between national and international poverty rates
Income group National vs. $1.9 rates National vs. $3.2 rates National vs. $5.5. rates
Low
Mean difference 2.00 −23.40 −40.72
BA—LOAa −35.19 and 39.19 −59.21 and 12.42 −66.12 and −15.32
Lower-middle
Mean difference 14.47 −3.31 −28.18
BA—LOA −17.55 and 46.50 −42.86 and 36.24 −73.36 and 16.99
Upper-middle
Mean difference 18.48 12.51 −3.64
BA—LOA −3.43 and 40.38 −7.50 and 32.53 −34.39 and 27.12
High
Mean difference 17.20 16.18 13.31
BA—LOA 1.49 and 32.91 1.01 and 31.35 −1.55 and 28.16
a BA Bland-Altman analysis, LOA limits of agreement
Table 8 Passing-Bablok regression analysis and Spearman’s rank correlation coefficient

Cusum test for Spearman’s coefficient
Method Intercept Slope linearity (p-value) (rS )
Low-income group
National vs. $1.9 −64.0547 2.1984 0.8131 0.341
National vs. $3.2 5.0643 1.3369 0.8131 0.336
National vs. $5.5 76.0643 0.3286 0.4038 0.435
Lower-middle-income group
National vs. $1.9 −9.3294 0.8834 0.4192 0.628*
National vs. $3.2 −17.2033 1.8138 0.7358 0.534*
National vs. $5.5 −1.1034 1.9746 0.7358 0.449*
Upper-middle-income group
National vs. $1.9 −0.7692 0.1477 0.4987 0.655*
National vs. $3.2 −2.0000 0.5000 0.4987 0.570*
National vs. $5.5 −8.0981 1.4534 1.0000 0.349*
High-income group
National vs. $1.9 −0.5536 0.0643 1.0000 0.748*
National vs. $3.2 −0.3724 0.0921 1.0000 0.694*
National vs. $5.5 −0.5885 0.2543 1.0000 0.572*
*p < 0.05
was in the high-income group—Spearman’s coefficient values were from 0.572

(correlation between $5.5 and national poverty rates) to 0.748 (correlation between
$1.9 and national poverty rates). Cusum test for linearity suggests that results of the
Passing-Bablok regression may be used in all cases.
In the lower-middle-income group, there was a clear systematic difference
between national and $1.9 poverty rates (−9.33 percentage points), and a small
proportional difference between these rates ($1.9 poverty rates are 11.66% lower
than national poverty rates). Between national poverty rates and international $3.2
poverty rates, there were both huge systematic (−17.20 percentage points) and
proportional differences ($3.2 poverty rates were 1.8 times higher than national
poverty rates). There was the most proportional difference between national and
$5.5 poverty rates ($5.5 poverty rates were almost two times higher than national
rates) and small systematic difference (−1.10 percentage points).
In the upper-middle-income group, both proportional and systematic differences
were evident, although the first difference was more pronounced between national
and $1.9 poverty rates ($1.9 rates are almost seven times lower than national rates),
and the second one was the most visible in the case of national and $5.5 rates (−8.10
percentage points).
In high-income countries, there was visible very huge proportional difference.
International poverty rates $1.9 are more than 15 times lower than national poverty
rates (slope 0.0643), $3.2 poverty rates almost 11 times lower than national
poverty rates (slope 0.0921), and $5.5 poverty rates almost four times lower than
national poverty rates (slope 0.2543). Simultaneously, in high-income countries, the
systematic difference was very low (about 0.5 percentage points).
4 Discussion
The results of this study show that national and international poverty rates are
correlated but not in agreement. The correlation was not visible only in the low-
income group. Detailed calculations in income groups presented in this study also
show that there is no agreement between national and international poverty rates. It
can be only noted that among analyzed groups the most predictable are national and
international poverty rates in the high-income group—there is a simple proportional
difference between these rates and almost no systematic difference.
Previous research focused only on correlation, and the agreement of methods was
not analyzed. Wagle (2019) studying the poverty in developing countries in 1990–
2016 focused, among others, on the relationship between methods using Pearson’s
coefficient. Based on his results (coefficients around 0.6), he suggested that poverty
rates move in the same direction and the relationships may be rather nonlinear.
The relationship between national and international $1.25 poverty lines was
also examined by Gentilini and Sumner (2012) and Greenstein et al. (2014). They
included in their study 146 countries from the whole world, and they found that
national and international poverty lines are significantly correlated (Pearson’s coef-
ficient 0.794). They also studied correlation among 114 countries after exclusion
high-income countries, and they showed that Pearson’s coefficient was 0.757. They
showed graphically that the shape of the relationship is not linear and better fitted is
a quadratic function. The authors concluded that differences between national and
national poverty lines could be very high (55 percentage points in poverty rates) and
only in a limited number of countries these rates are similar. The authors concluded
that national poverty lines are not substitutes for international poverty lines and may
only enrich international analyses.
It can be seen that our finding concerning the relationship between national
and international poverty rates is in agreement with the previous studies. An
emerging problem with the linearity of the relationship has caused that in this
study other measures than Pearson’s coefficient were used. Analyzing the poverty
rates according to $1.9 and $3.2 lines many countries from the upper-middle and
high-income groups have reached minimum value, and for this reason, the problem
with linearity appeared. Therefore in this study, Spearman’s coefficient instead of
Pearson’s coefficient was used. The strength of correlation based on Spearman’s
coefficient is similar to strength calculated in the previous studies.
Setting up by the World Bank, the three international poverty lines instead
of one poverty line was intended to improve the fit of lines according to the
income situation of the country. The World Bank noticed that richer countries
have higher poverty lines and poorer countries have lower poverty lines (World
Bank, 2015). Although new lines have been set, national and international poverty
lines may be treated as a supplement only in several countries. The differences
between poverty rates in many cases are still very huge (see Appendix). It seems
impossible to set a few global poverty lines which will be fitted to national
poverty lines. Small differences in percentage points according to the line set
up for lower-middle-income countries ($3.2 line) and national poverty lines are
both in lower-income (e.g., Sierra Leone, Burkina Faso) and upper-middle-income
countries (e.g., Kazakhstan, Sri Lanka). It should also be emphasized that huge
differences are visible in lower-middle-income countries for which this line was
created (e.g., Solomon Islands and India—negative differences; Mongolia and
Bolivia—positive differences). The similar situation is in the case of line set up
for upper-middle-income group ($5.5 line) —there were low differences between
poverty rates in lower-middle (e.g., Mongolia, El Salvador) and upper-middle-
income countries (e.g., Romania, Thailand), and high differences in both groups
(e.g., in the lower-middle-income group the Solomon Islands with negative and
Bolivia with a positive difference, in upper-middle-income group Iraq with negative
and Montenegro with a positive difference). It must be noted that in the low and
lower-middle-income group, the differences between national and $3.2 poverty rates
are very high (up to −50.8 percentage points in Tanzania) and even higher between
national and $5.5 poverty rates (up to −72.0 percentage points in the Solomon
Islands). An interesting situation is in the case of differences between national
and $1.9 poverty rates—they could range from −35.7 to 50.9 percentage points.
Extreme differences occur in Congo and Zimbabwe, respectively. Both countries

are from the lower-middle-income group which means that the poverty line $1.9 is
not definitely well fitted to this group of countries.
This study has some limitations. The main problem is the lack of information
in the World Bank database about poverty rates from many countries, especially
from the high-income group. The second limitation is connected with time range—
the data refer to different years (from 2011 to 2017). During 6 years, the economic
situation can change, and poverty rates also may change. Then the data from 2011
do not reflect the actual state.
5 Conclusion
International and national poverty rates are not comparable and should not be used
interchangeably. There are visible both proportional and systematic differences
between national and international poverty rates. Taking into account the division
of countries according to income (GNI per capita), it can be seen that in lower-
middle-income countries the systematic difference is more visible and in the richer
countries, the clearer proportional difference and the smaller systematic difference.
Summarizing, national and international poverty lines are not substitutes and give
different information about the material situation. International poverty lines give
information about global poverty, but they do not include regional specificity which
is incorporated in national poverty lines. Therefore, national and international
poverty lines complement each other, and the best solution is to analyze both types
of lines in order to get a more complete picture of poverty in the world.
A.1 Appendix
See Figs. 3, 4, and 5.

Zimbabwe
Guatemala
Honduras
Mexico
Gambia, The
Sey chelles
South Af rica
Haiti
Fiji
Boliv ia
Gabon
Y emen, Rep.
Mongolia
Dominican Republic
West Bank and Gaza
El Salv ador
Tajikistan
Nicaragua
My anmar
Micronesia, Fed. Sts.
Paraguay
Argentina
Mauritania
Comoros
Montenegro
Armenia
Ky rgy z Republic
Colombia
Latv ia
Lithuania
Estonia
Bulgaria
Pakistan
Serbia
St. Lucia
Guinea
Panama
Romania
Samoa
Costa Rica
Croatia
Peru
Ecuador
Cote d'Iv oire
Bosnia and Herzegov ina
Kosov o
Georgia
Poland
Iraq
North Macedonia
Philippines
Tunisia
Slov enia
Hungary
Turkey
Cameroon
Russian Federation
Albania
Slov ak Republic
Timor-Leste
Ghana
Liberia
Czech Republic
Moldov a
Bangladesh
Senegal
Thailand
Chad
Chile
Vietnam
Uruguay
Mauritius
Bhutan
Belarus
Togo
Algeria
China
Indonesia
Djibouti
Namibia
Morocco
Ukraine
Sri Lanka
Kazakhstan
India
Lao PDR
Sierra Leone
Malay sia
Niger
Zambia
Burkina Faso
Madagascar
Burundi
Benin
Solomon Islands
low/lower
Congo, Dem. Rep. middle income
Mozambique
Rwanda countries
Malawi
Uganda
Tanzania
Congo, Rep.
-40 -30 -20 -10 0 10 20 30 40 50 60
Fig. 3 Percentage points difference between national and $1.9 poverty rates. Source: own
processing
Sey chelles high/upper

Mexico
Guatemala middle income
Honduras
Zimbabwe countries
Dominican Republic
Boliv ia
West Bank and Gaza
Montenegro
Argentina
Mongolia
Gabon
Latv ia
Paraguay
El Salv ador
Estonia
Fiji
Lithuania
Bulgaria
Croatia
South Af rica
Costa Rica
Nicaragua
Poland
Colombia
Panama
Serbia
Kosov o
St. Lucia
Hungary
Armenia
Slov enia
Russian Federation
Ecuador
Turkey
Romania
Tunisia
Slov ak Republic
Peru
North Macedonia
Tajikistan
Gambia, The
Samoa
Czech Republic
Moldov a
Thailand
Haiti
Uruguay
Mauritania
Chile
Albania
Ky rgy z Republic
Belarus
Georgia
Mauritius
Comoros
Ukraine
My anmar
Kazakhstan
Algeria
Vietnam
Iraq
Malay sia
China
Morocco
Y emen, Rep.
Bhutan
Philippines
Sri Lanka
Ghana
Cameroon
Pakistan
Cote d'Iv oire
Namibia
Guinea
Indonesia
Togo
Djibouti
Chad
Zambia
Madagascar
Congo, Rep.
Senegal
Liberia
Burundi
Congo, Dem. Rep. low/lower
Sierra Leone
Bangladesh middle income
Timor-Leste
Niger countries
Lao PDR
Mozambique
Benin
Burkina Faso
Malawi
India
Rwanda
Solomon Islands
Uganda
Tanzania
-60 -50 -40 -30 -20 -10 0 10 20 30 40 50
Fig. 4 Percentage points difference between national and $3.2 poverty rates. Source: Own
processing
Sey chelles
Montenegro
Estonia
Argentina
Mexico high/upper
Lithuania
Latv ia middle income
Poland
Slov enia countries
Croatia
Bulgaria
Boliv ia
Hungary
Honduras
Dominican Republic
Russian Federation
Guatemala
Costa Rica
Slov ak Republic
Czech Republic
Paraguay
Panama
West Bank and Gaza
Belarus
Uruguay
St. Lucia
Turkey
Serbia
Chile
Gabon
El Salv ador
Thailand
Romania
Colombia
South Af rica
North Macedonia
Ecuador
Zimbabwe
Peru
Malay sia
Mongolia
Ukraine
Tunisia
Kosov o
Nicaragua
Kazakhstan
Moldov a
Mauritius
Samoa
Fiji
Vietnam
Comoros
Haiti
China
Georgia
Tajikistan
Algeria
Gambia, The
Armenia
Albania
Morocco
Madagascar
Mauritania
Bhutan
Cameroon
Burundi
Namibia
Zambia
Y emen, Rep.
Philippines
Ghana
Congo, Dem. Rep.
Togo
My anmar
Cote d'Iv oire
Sri Lanka
Guinea
Iraq
Chad
Ky rgy z Republic
Liberia
Senegal
Congo, Rep.
Sierra Leone
Malawi
Mozambique
Indonesia
Niger low/lower
Djibouti
Benin middle income
Pakistan
Burkina Faso countries
Timor-Leste
Rwanda
Bangladesh
Lao PDR
Tanzania
India
Uganda
Solomon Islands
-80 -60 -40 -20 0 20 40
Fig. 5 Percentage points difference between national and $5.5 poverty rates. Source: Own
processing
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The Role of Strategic Agility
and Economic Environment’s
Friendliness-Hostility in Explaining
Success of Polish SMEs
Tomasz Sikora and Ewa Baranowska-Prokop
Abstract The main purpose of this chapter is to present and discuss two elements
influencing the success of Polish SMEs: perceived environmental hostility and
strategic agility. Strategic agility has been operationalized through the distinction
between firms applying mono-strategy (less agile firms, doing business with
customers on similar terms) or multi-strategy (more agile firms, differentiating
conditions depending on the customer) in two aspects: price level and product
quality level. Environmental friendliness-hostility has been operationalized as the
properties of the external (or macro) environment in which firms operate as
perceived by respondents. This concept is measured by bipolar scales reflecting the
continuum from “friendly” or “benign” to “hostile” environment.
Research results show that, in the case of pricing strategy, the majority of
firms were multi-strategic, i.e., they applied two or more price levels for the
same product. But for the product quality strategies, the situation is opposite and
mono-strategic firms prevail. Results of ANOVA analyses revealed that multi-
strategic firms achieved better results (profits, sales dynamics) in the case of
pricing strategy, but not in the case of product quality strategy. Firms operating
in friendly environment achieved better results compared to firms operating in
neutral or hostile environment. The differences in results between mono- and multi-
strategic firms were particularly strong in favor of multi-strategic firms (both for
price strategy and to a lesser extent for quality strategy) in hostile environment.
Stepwise regression analyses performed separately for exporters and non-exporters
with the two explanatory variables (strategic agility and environment characteristics)
and one control variable (size of enterprise) transformed into binary variables show
that strategic agility and environment are significant but weak predictors of market
performance.
T. Sikora () · E. Baranowska-Prokop

Warsaw School of Economics, Warsaw, Poland
e-mail: tsikora@sgh.waw.pl
https://doi.org/10.1007/978-3-030-63970-9_19
268 T. Sikora and E. Baranowska-Prokop
Keywords Strategic agility · Environmental hostility · Competitive strategies ·

Export strategies · SMEs
JEL Codes: L11, M10, M16, M31
1 Introduction
SMEs sector is playing an important role in the economic development of Poland

and other developed countries. It is not only due to the creation of budgetary
revenues to a country and particular municipal districts but first of all due to job
creation, being a source of innovative ideas and important stakeholder in local
governments. SMEs in EU member countries account for 98% of all enterprises,
provide jobs for about 2/3 of employed persons, and create 60% of EU’s GDP.
Globalization, increased rate of knowledge transfer, rapid technological changes,
talent mobility, etc., resulted in turbulent environment and growing need for revised
strategic perspective. SMEs are facing challenges which in their character are:
difficult to predict, deep, nonpersistent, and abrupt. The new reality of functioning
in turbulent environment requires managerial staff to change in a wide range
of strategic operations, e.g., competitive strategies. In the mid-1980s, Aaker and
Mascarenhas (1984) noticed that growing uncertainty and fast change in environ-
ment were resulting in serious difficulties to apply conventional methods of firm
management. The concept of strategic agility defined as an ability to adapt to rapid,
intense, and difficult to forecast changes in firm’s environment has been introduced.
Agility can be expressed, e.g., by implementation of product strategy and ability
to exploit new arising market opportunities (Sanchez, 1995). In the following
years, this concept was developed through both: academics and practitioners,
e.g., Doz and Kosen (2008a), Doz and Kosen (2008b), Weber and Tarba (2014).
Gunaskaran (1998) is defining entrepreneurial agility as capacity to survive and
cope with challenges in turbulent environment. Weber and Tarba (2014) proposed
the following definition: Strategic agility is an ability of management to constantly
and rapidly sense and respond to a changing environment by intentionally making
strategic moves and consequently adapt the necessary organizational configuration
for its successful implementation. According to Goldman, Nagel, and Preiss (1995),
strategic agility is a complex answer to business challenges which provide solution
for SMEs to achieve profitability in dynamic, fragmented, and global markets.
Vokurka and Fliedner (1998) suggested that strategic agility should be perceived
as firm’s ability to efficiently offer wide range of low-cost, high-quality products
in a short time span that allows the firm to create value for the client through
customization. Strategic agility has also been a subject of investigation by several
Polish researchers, e.g., Sajdak (2014). The key challenge to Polish SMEs is fast
adjustment of product offer to changing tastes and consumer preferences along with
effective creation of entry barriers to the occupied market niche.
The Role of Strategic Agility and Economic Environment’s Friendliness... 269
It should be stressed that strategic agility plays a crucial role in choosing foreign
market entry strategies (Junni, Sarala, Tarba, & Weber, 2015). More and more
often, transnational corporations are using strategic agility to explore opportunities
emerging in global markets, especially through the choice of contractual entry
strategies, i.e., joint ventures, strategic alliances, or M&A.
According to Weber and Tarba (2014), strategic agility is becoming a core
competence in the case of firms operating on emerging and post-transformation
markets.
Application of strategic agility could also be an effective tool for competitive
strategy of exporting SMEs. According to PARP Report (2019), Polish SMEs
demonstrate strong dynamics of export growth. However, the export offer of product
portfolio is no different from the domestic market supply. Adjustment of the
product offer to the requirements of the foreign customer is rather limited. The
pricing strategy of Polish SMEs is grounded on a simple cost-based method with
a simultaneous comparison to the prices of competitive products. Jonas (2013)
observes that a significant majority of Polish SMEs is setting the export prices at a
different level than in the domestic market, which should be viewed as an indication
of strategic agility.
Since there are various definitions of strategic agility, some of them stressing a
capacity to adapt to environment, we define this concept based on the difference
between “mono-strategy”, i.e., a strategy resulting in acting in one specific way
and “multi-strategy”, which is an application of differentiated strategies through
the use of specific marketing tools adjusted to the type of clients or markets.
And we consider that “multi-strategy” represents a higher level of strategic agility
than mono-strategy because it implies a higher level of adaptation to the existing
situation and potential changes in markets and broadly considered environment.
Two marketing tools or strategies have been used in this research: product quality
and price. Our operationalization of strategic agility can be seen as a behavioral
one, based on what firms actually do, unlike some other operationalizations based
on multi-item scales (see Roberts & Grover, 2012).
Multi-strategy is a normal situation in big enterprises divided into strategic
business units (often linked to major brands and/or major markets or types of
products) and translates into existence of many autonomous or semi-autonomous
decision centers. However, in the case of SMEs offering a limited range of products,
there is, in general, one decision-making center responsible for strategy elaboration
and implementation. That is why it is worth analyzing if and to what extent firms’
strategies are simple and homogeneous and to what extent they are differentiated and
heterogeneous and whether there are differences in performance (profits and sales
dynamics) between firms applying one uniform strategy or two (or more) types of
strategy.
External environment is included in PESTEL analysis. The categories of envi-
ronment challenging the firms on the domestic and foreign markets are political,
economic, sociocultural, technological, natural (the second E), and legal.
Environmental hostility (or munificence) has been described as “an environment
ability to support the sustained growth of an organization” (Goll & Rasheed, 1997,
p. 585). An environment is considered to be hostile when firms face a tough and

intense competition, regulatory restrictions, shortage of resources, uncertainty, and
unpredictability (Covin & Slevin, 1989). Khandwalla (1977) elaborated a three-item
bipolar scale measuring the degree of environment friendliness-hostility, later used
by Covin and Slevin (1989).
2 Research Method and Hypotheses
Presented research was based on market data collected by AMS research company
in May–July 2019 through questionnaires sent to a representative sample of Polish
SMEs established after 2004 (both with exports being least 25% of their sales or
not-exporting at all).
Data collection was conducted through the Internet questionnaire (CAWI) and
telephone interviews (CATI). The total sample size was 240 firms randomly
selected from the database of 2969 Polish SMEs firms. The share of exporters and
non-exporters in the sample is 50%–50%, the share of medium-sized and small
enterprises is 33.3% and 67.7%, respectively.
Two hypotheses, based on results of previous research, imply direct relationships
between market performance and separately, strategic agility and environment
friendliness—hostility.
Roberts and Grover (2012, p. 579) argue that “in today’s hypercompetitive
environment, firms that are agile tend to be more successful.” They found positive
relationships between agility measures they used and enterprises’ performance.
Therefore, our first hypothesis identifies a positive relationship between strategic
agility and measures of enterprises’ performance. Taking into account operational-
ization of strategic agility and market performance measures this hypothesis states
that:
H1: Agile (multi-strategic) firms achieve better results compared to non-agile
(mono-strategic) firms.
According to Miller and Friesen (1983) and previously quoted research hostility
of external environment reduces resources, decreases profit margins, and handicaps
maneuverability. Taking into account the restraining role of hostile environment
and favorable role of friendly environment the hypothesis concerning relationship
between environment and market performance may be formulated as follows:
H2: There is a positive relationship between the degree of external environment
friendliness and market performance (alternatively, the more hostile external envi-
ronment the worse economic results).
The third hypothesis is based on expected interaction and addresses the “core”
of strategic agility usefulness: it should be particularly useful in hostile, risky, and
turbulent environment and less useful in friendly environment.
H3a: Superiority of multi-strategic firms over mono-strategic firms is the greatest
in hostile environment compared to neutral and friendly environment.
H3b: In neutral environment superiority of multi-strategic firms over mono-

strategic firms is bigger than in friendly environment.
Both H3a and H3b imply that the superiority of multi-strategic firms over mono-
strategic firms is the weakest, if any, in friendly environment.
Market performance measures include:
(a) One-year declared financial results (year 2018, in terms of profits or losses),
(b) Declared sales evolution between 2 years (2018 over 2017),
(c) Composite measure of performance (based on profit or loss declarations and
declared sales evolution for 2 years: 2017 and 2018).
Next, we present distribution and characteristics of independent variables,
dependant variables, and analyses aimed at tests of hypotheses.
3 Independent Variables: Strategic Agility and Environment

Friendliness—Hostility
Strategic agility is operationalized through differentiation between mono-strategy

and multi-strategy in two aspects of strategy: price strategy (setting one price level
for all customers vs. multiple price levels depending on customer) and product
quality strategy (producing all goods at a given quality level vs. producing the same
goods at different quality levels depending on customers’ requirements and/or their
ability to detect quality variations). Table 1 presents the answers of interviewed
managers related to price strategy.
Two or more different price strategies are implemented in the majority of
enterprises. Exporters more frequently adopted multi-strategy in regards to price
than non-exporters (77.5% against 54.2%, the difference is significant: χ 2 = 14.5,
p < 0.0001). The difference between small and medium-sized firms (63% against
73%) is not significant.
Since the phenomenon of multi-strategy is considered to be an aspect of strategic
agility, exporters appear to be more strategically agile than non-exporters.
Table 2 shows answers about price-level strategy by respondents from mono-
strategic firms.
Table 1 Single price level strategy vs. multiple price level strategies
Frequency Percent
Valid Single price strategy (mono-strategic enterprises) 82 34.2
Multiple price strategies (multi-strategic enterprises) 158 65.8
Total 240 100.0
Source: own elaboration
Table 2 Single price level strategy characteristics (mono-strategic firms)

Frequency Percent Valid percent
Valid Lower prices compared to competitors 5 2.1 6.1
Slightly lower prices compared to competitors 9 3.8 11.0
Prices comparable to average prices on the market 49 20.4 59.8
Slightly higher prices compared to competitors 14 5.8 17.1
Higher prices compared to competitors 5 2.1 6.1
Total 82 34.2 100.0
Missing System 158 65.8
Total 240 100.0
Source: own elaboration, seven-point scale
Table 3 Multiple price level strategies: the most important strategy

Valid Lower prices compared to competitors 3 1.3 1.9
Slightly lower prices compared to competitors 25 10.4 15.8
Prices comparable to average prices on the market 91 37.9 57.6
Slightly higher prices compared to competitors 32 13.3 20.03
Higher prices compared to competitors 7 2.9 4.4
Total 158 65.8 100.0
Total 240 100.0
Strategy of setting prices at levels comparable to average prices on the market

is the most popular one (almost 60% of mono-strategic firms). No firms declared
having set prices at the lowest or the highest level on the market.
Table 3 shows answers about price level strategy by respondents from multi-
strategic firms and includes information about the most important strategy. The very
existence of such firms reveals that the reality in SMEs may be complex in the sense
that one firm (producing single product or a limited range of products) may apply
several different strategies.
Also, in this case, firms setting prices at levels comparable to average prices
on the market are the biggest single group with the share approaching 60% and
no firms are price leaders in either direction, i.e., setting prices at the highest or
lowest level compared to competitors. According to previous research on Polish
firms (Jonas, 2013) exporters used to set prices at different levels on domestic and
foreign markets. Our findings show that also non-exporters set prices at different
levels for the domestic market.
Table 4 presents data about the second measure of strategic agility: mono- and
multi-strategies related to product quality.
For product quality level strategy substantial majority of respondents (almost
85%) declared pursuing a strategy of a single quality standard. This cannot be seen
Table 4 Single product quality level strategy vs. multiple product quality level strategies
Frequency Percent
Valid Single quality level strategy (mono-strategic enterprises) 203 84.6
Multiple quality level strategies (multi-strategic enterprises) 37 15.4
Total 240 100.0
Table 5 Single product quality level strategy characteristics

Valid Lower quality compared to competitors 1 .4 .5
Slightly lower quality compared to competitors 2 .8 1.0
Quality comparable to average level on the market 43 17.9 21.2
Slightly higher quality compared to competitors 65 27.1 32.0
Higher quality compared to competitors 92 38.3 45.3
Total 203 84.6 100.0
Total 240 100.0
as a surprise, because varying quality standards may involve changes in production

processes and thus be more complex and costly than changing prices.
The two measures of strategic agility are very weakly positively correlated in the
way that multi-strategic firms for price level strategy are also slightly more prone to
be multi-strategic in the case of product quality level strategy (χ 2 = 4521, p < 0.033,
Kendall’s tau-b = 0.137, p = 0.034).
Also in this case exporters have been more willing to apply multi-strategy
(17.5%) compared to non-exporters (13.3%), but the difference is not significant.
Difference between medium-sized and small firms in this respect (18.8% against
13.8%) is not significant either.
Table 5 presents answers about product quality level strategy by respondents
from mono-strategic firms.
The distribution of answers is skewed towards the higher end of the scale (dec-
larations about higher quality). The biggest single group of respondents declared
selling products of higher quality compared to competitors (above 45% of mono-
strategic firms) and there are no declarations about product quality which would be
the highest or the lowest on the market.
Similarly to Table 3, Table 6 shows answers about product quality level strategy
by respondents from multi-strategic firms and includes information about the most
important strategy.
Among multi-strategic firms, substantial majority (around 70%) declared selling
goods of slightly higher or—mainly—higher quality compared to competitors as the
main strategy, and none of them admitted to pursue lower quality strategy. Moreover,
no respondents indicated that products of their firms were either of the lowest or of
the highest quality.
Table 6 Multiple quality level strategies: the most important strategy

Valid Quality comparable to average level on the market 10 4.2 27.0
Slightly higher quality compared to competitors 16 6.7 43.2
Higher quality compared to competitors 11 4.6 29.7
Total 37 15.4 100.0
Total 240 100.0
According to results of Tables 2, 3, 5, and 6 Polish SMEs compete on the market

mainly by selling products of higher than average quality at average prices.
We prefer to use the expression “environment hostility—friendliness” to reflect
the two sides of this phenomenon included in the properties of scale measuring
it (items formulation). Operationalization of hostility—friendliness of external
environment is based on a three-items scale proposed by Khandwalla (1977),
presented by Covin and Slevin (1989), to which the authors added the fourth item.
The items are preceded by a question: “How would you characterize the external
environment within which your firm operates?” They are formulated as follows:
– very safe, little threat to the survival and well-being of my firm vs. very risky, a
false step can mean my firm’s undoing,
– rich in investment and marketing opportunities vs. very stressful, exacting,
hostile, very hard to keep afloat,
– an environment that my firm can control and manipulate to its own advantage
such as a dominant firm has an industry with a little competition and few
hindrances vs. a dominating environment in which my firm’s initiatives count for
very little against the tremendous competitive, political, or technological forces.
One item has been added by the authors: stable, foreseeable vs. unstable,
changing.
In Table 7, the items (measured on a seven-point scale) are referred to as:
– very safe vs. very risky,
– friendly, opportunity-rich vs. stressful, hostile,
– controllable vs. non-controllable, dominating,
– stable, foreseeable vs. unstable, changing.
Table 7 presents descriptive statistics for the scale of external environment
friendliness-hostility.
Analysis of frequencies reveals that answers indicating an exact midpoint for
any item of the scale, i.e., strictly neutral environment, represent around 50% of the
total.
Reliability of this scale is good, because the Cronbach alpha coefficient, the
Spearman-Brown Coefficient Equal Length as well as Guttman’s L coefficients
(2–6) are above 0.8. Therefore values of the items have been added and the final
Table 7 Descriptive statistics for the environment friendliness—hostility scale

N Mean Std. deviation Skewness Kurtosis
Statistic Statistic Statistic Statistic Std. error Statistic Std. error
Very safe 240 3.74 1.344 −.301 .157 .255 .313
[1]—very
risky [7]
Friendly, 240 3.58 1.314 −.302 .157 −.100 .313
opportunity-
rich
[1]—
stressful,
hostile [7]
Controllable 240 3.86 1.377 −.189 .157 .286 .313
[1]—non-
controllable,
dominating
[7]
Stable, 240 3.85 1.325 −.218 .157 .366 .313
foreseeable
[1]—
unstable,
changing [7]
Valid N 240
(listwise)
Table 8 Environment hostility-friendliness scale: three forms of environment

Frequency Percent Valid percent Cumulative percent
Valid Friendly environment 63 26.3 26.3 26.3
Neutral environment 129 53.8 53.8 80.0
Hostile environment 48 20.0 20.0 100.0
Total 240 100.0 100.0
single scale has values between 4 (very friendly or benign environment) and 24
(very difficult, hostile environment) with the midpoint at 16.
Further categorization into three categories of firms declaring doing business in
friendly, neutral, and hostile environment was made in such a way that the category
in the middle does not “absorb” the remaining two (Table 8). The category of
neutral environment is composed of firms declaring neutrality of environment close
to the midpoint (midpoint and +/−1 point) and the other two categories should
be considered as regrouping firms having declared doing business in environment
ranging from mildly friendly to very friendly and from mildly hostile to very hostile.
As concerns differences in perception of environmental hostility-friendliness
between exporters and non-exporters and between small and medium-sized enter-
prises, univariate analysis of variance shows that both main effects are significant,
and the interaction is significant as well. Non-exporters and small firms perceived
economic environment as being more hostile compared to exporters and medium-
sized firms (main effects significant at p = 0.01 and 0.012). According to the form
of interaction (significant at p = 0.036) in the case of non-exporters both small
and medium-sized firms perceived environment as similarly neutral (mean for small
non-exporters = 15.92 with mid-point of the scale at 16 and mean for medium-
sized non-exporters = 15.65), but medium-sized exporters perceived environment
as friendly or benign whereas small exporters as close to neutral (mean for medium-
sized exporters = 12.65, mean for small exporters = 15.60).
4 Dependent Variables: Indicators of Firms’ Performance
Due to impossibility of obtaining precise figures about profits and sales, descriptive
questions about market performance in 2017 and 2018 had to be applied.
Respondents from companies evaluated, in general terms, the level of prof-
its/losses and sales dynamics on five-point scales. The degrees of the profit/loss scale
include substantial loss (1), small loss (2), result close to zero (3), small profit (4),
and substantial profit (5). The degrees of scale measuring sales dynamics include
substantial decrease by two-digit % (1), decrease by one-digit % (2), no change (3),
increase by one-digit % (4), substantial increase by two-digit % (5).
A composite measure of performance “factor market performance in 2017 and
2018” has been obtained via factor analysis on four variables: financial results in
2018, financial results in 2017, sales dynamics 2018/2017, and sales dynamics
2017/2016. The analysis led to obtaining one component explaining 68.8% of
variance.
Table 9 presents descriptive statistics related to measures of firms’ performance.
According to univariate analysis of variance, every measure of financial results
has been better evaluated by exporters compared to non-exporters. Differences
between small and medium-sized firms and interactions are not significant.
5 Verification of Hypotheses
Hypothesis 1 implied positive relationship between strategic agility and perfor-

mance, i.e., achieving better results by multi-strategic firms compared to mono-
strategic firms.
Figure 1 presents the results of ANOVA analysis of relationship between these
variables for the price strategy.
According to Welch and Brown-Forsythe tests, there are significant differences
in all market performance measures presented in Table 10.
The differences between mono- and multi-strategic firms concerning product-
quality level were both inconsistent and nonsignificant. They were inconsistent in
Table 9 Descriptive statistics concerning measures of firms’ performance

N Mean Std. deviation Skewness Kurtosis
Statistic Statistic Statistic Statistic Std. error Statistic Std. error
Financial 240 3.92 .782 −.593 .157 .527 .313
results in
2018 [1:5]
Sales 240 3.71 .881 −.134 .157 −.560 .313
dynamics in
2018
compared to
2017 [1:5]
Factor: 240 .00 1.00 −.179 .157 −.304 .313
market
performance
2017–2018
Valid N 240
(listwise)
Source: own elaboration; financial results in 2018 and sales dynamics in 2018 compared to 2017
have been measured on five-point scales
Fig. 1 Relationship between strategic agility in terms of price strategy and performance indicators
the way that for financial profits mono-strategic firms declared on average better
results than the multi-strategic ones, but for the two remaining indicators, as in the
case of price strategy, multi-strategic firms declared having achieved better results
than the mono-strategic ones. We may conclude that the first hypothesis is confirmed
for the price strategy only and not confirmed for product quality strategy.
According to hypothesis 2, there should be a positive relationship between
the degree of economic environment friendliness and success on the market
(or, alternatively, the more hostile economic environment the worse economic
results). Relationship between environment friendliness—hostility and performance
indicators according to results of ANOVA analysis is presented in Fig. 2.
The results indicate nonlinear relationship between the degree of environment
friendliness—hostility and market performance measures, looking like something
between L-shaped and V-shaped for financial results and sales dynamics, and like an
L-shaped one for the composite measure of market performance. Although respon-
dents from firms operating in friendly environment declared consistently the best
Table 10 Robust tests of equality of means concerning relationship between strategic agility in
terms of price strategy and market performance
Statistica df1 df2 Sig.
Financial results in 2018 Welch 4.691 1 141.969 .032
Brown-Forsythe 4.691 1 141.969 .032
Sales dynamics in 2018 compared to 2017 Welch 8.894 1 181.266 .003
Brown-Forsythe 8.894 1 181.266 .003
Factor: market performance 2017–2018 Welch 8.929 1 150.228 .003
Brown-Forsythe 8.929 1 150.228 .003
Source: own elaboration; financial results without five outliers, sales dynamics without one outlier
and market performance without three outliers
a Asymptotically F distributed
Fig. 2 Relationship between environment friendliness—hostility and performance indicators
Table 11 Robust tests of equality of means concerning relationship between environment

friendliness—hostility and market performance
Brown-Forsythe 3.092 2 138.220 .049
Brown-Forsythe 1.869 2 164.401 .158
Brown-Forsythe 3.021 2 155.174 .052
results, surprisingly, hostile environment does not appear as the most unfavorable. In
2 out of 3 cases respondents from firms operating in a neutral environment declared
numerically the lowest average levels of performance indicators (difference between
neutral and hostile environment is not significant in this respect, however).
According to Welch and Brown-Forsythe tests (Table 11) there are significant
differences only in the case of financial results in 2018 and composite measure of
market performance for 2017 and 2018.
Table 12 Relationship between strategic agility in terms of price strategy and market perfor-
mance in hostile environment; descriptives
N Mean Std. deviation
Financial results in 2018 .795
Multiple price strategies 29 4.21 .675
Total 46 3.98 .774
Sales dynamics in 2018 compared to 2017 Single price strategy 17 3.41 .507
Total 47 3.72 .852
Factor: market performance 2017–2018 Single price strategy 17 −.4974 .74345
Multiple price strategies 30 .2112 .98803
Total 47 −.0451 .96236
terms of price strategy and market performance in hostile environment
Brown-Forsythe 7.234 1 29.377 .012
Brown-Forsythe 5.201 1 44.875 .027
Brown-Forsythe 7.719 1 41.254 .008
We may conclude that the second hypothesis is partially confirmed in the way
that friendly environment contributes to achieving better results by enterprises, but
hostile environment did not lead to worse results than neutral environment.
Hypothesis 3 implied that the advantage of multi-strategic (and thus more
strategically agile) firms over mono-strategic (and less agile) firms would be greater
in hostile environment compared to neutral and friendly environment.
Table 12 presents data concerning relationship between strategic agility (results
achieved by mono- and multi-strategic firms) and market performance in the case of
price strategy solely in hostile environment (20% of enterprises). The Table should
be considered as an alternative presentation of data in comparison with Fig. 1.
According to Welch and Brown-Forsythe tests, all differences are significant
(Table 13).
In hostile environment results are similar to those presented in Fig. 1, i.e.,
respondents from multi-strategic (and more agile) firms declared having achieved
better results than those from mono-strategic (and less agile) firms.
Table 14 Relationship between strategic agility in terms of product quality strategy and market
performance in hostile environment; descriptives
Multiple quality level strategies 7 4.57 .535
Total 46 3.98 .774
Sales dynamics in 2018 compared Single quality level strategy 40 3.63 .897
to 2017
Multiple quality level strategies 8 3.88 1.126
Total 48 3.67 .930
Factor: market performance Single quality level strategy 40 −.2048 .97389
2017–2018
Multiple quality level strategies 8 .4258 1.17721
Total 48 −.0997 1.02462
Source: own elaboration; financial results without two outliers, sales dynamics and market
performance without one outlier each
terms of product quality strategy and market performance in hostile environment
Brown-Forsythe 8.756 1 11.018 .013
Sales dynamics in 2018 compared to 2017 Welch .350 1 8.864 .569
Brown-Forsythe .350 1 8.864 .569
Brown-Forsythe 2.020 1 9.017 .189
product quality strategy in hostile environment. The Table should also be considered
as an alternative presentation of data in comparison with Fig. 1.
According to Welch and Brown-Forsythe tests, only one difference is significant
(Table 15).
Although numerically in all cases multi-strategic firms achieved better results
than the mono-strategic ones, the difference is significant in the case of financial
results only.
In the case of firms evaluating environment as neutral (53.8% of enterprises)
although for price strategy for all market performance measures multi-strategic
firms achieved better results compared to mono-strategic ones, these differences are
not significant.
For product quality level strategy there was an advantage of mono-strategic firms
over multi-strategic ones in two cases: financial results in 2018 and composite
market performance, and there was an opposite situation for sales dynamics,
but differences in all cases are not significant. We can conclude that in neutral
Table 16 Relationship between strategic agility in terms of price strategy and market performance
in friendly environment; descriptives
Total 63 4.11 .743
Sales dynamics in 2018 compared to 2017 Single price strategy 17 3.29 .849
Total 63 3.87 .871
Factor: market performance 2017–2018 Single price strategy 17 −.1600 1.07102
Multiple price strategies 45 .4610 .87557
Total 62 .2907 .96533
Source: own elaboration; market performance without one outlier
terms of price strategy and market performance in friendly environment
Financial results in 2018 Welch .479 1 26.708 .495
Brown-Forsythe .479 1 26.708 .495
Brown-Forsythe 11.276 1 26.730 .002
Brown-Forsythe 4.563 1 24.531 .043
environment higher strategic agility did not lead to significantly better results than
mono-strategy.
price strategy in friendly environment (26.3% of enterprises).
According to Welch and Brown-Forsythe tests two out of three differences are
significant (Table 17).
In the three cases, multi-strategic firms achieved better results than mono-
strategic firms, but the differences are significant for sales dynamics and composite
measure of market performance.
For product quality strategy there were no significant differences between multi-
and mono-strategic firms.
We may conclude that hypothesis 3 has been partially confirmed in the case of
H3a and disconfirmed in the case of H3b.
In hostile environment multi-strategic, more agile firms achieved better results
in comparison with mono-strategic, less agile firms for all measures of market
performance in the case of price strategy, but also in one aspect of market
performance related to product quality strategy (that’s why there was a partial
confirmation only).
The fact that there were no significant differences between the two groups of
firms in neutral environment in terms of market performance and the fact that the
advantage of multi strategic firms over the mono-strategic ones has been weaker
in friendly environment than in hostile environment adds positively to the partial
confirmation of H3a.
However, the fact that it is in friendly environment where advantages of multi-
strategic firms over mono-strategic firms—although partial—have been greater than
in neutral environment should be considered as disconfirmation of hypothesis H3b.
Analyses of stepwise linear regression (backward elimination) performed sep-
arately for exporters and non-exporters, with both explanatory variables (strategic
agility, environmental friendliness-hostility) and one control variable (enterprises
size) being transformed into binary variables reveal that strategic agility and
environment characteristics show significant weak relationships with performance
measures. In simple regression models for exporters neutral environment is neg-
atively correlated with financial results (standardized β = Pearson’s r = −0.21,
p = 0.023, without three outliers). For non-exporters hostile environment is
negatively correlated with financial results (r = −0.274, p = 0.003, without
one outlier) and with composite measure of market performance (r = −0.217,
p = 0.018, without two outliers) and multiple price level strategy shows weak
positive relationship with sales dynamics (r = 0.162, p = 0.077).
6 Summary and Conclusion
Results support hypothesis about positive relationship between strategic agility

(defined in terms of multi-strategy implying its higher degree and mono-strategy
representing its lower degree) and enterprises’ performance in the case of price
strategy. For product quality strategy results are inconclusive, because significant
relationship between strategic agility and performance was found only in hostile
environment for one out of three measures of market performance.
The relationship between environment hostility and performance is not straight-
forward. Although firms operating in friendly environment declared the best results
on all three market performance measures, differences between firms doing business
in neutral and hostile environment are not significant.
In general, the advantage of strategic agility can be seen in the most clear way in
hostile environment. Paradoxically, it is in friendly environment, and not in neutral
environment where more agile firms achieved better results than the less agile firms.
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Macroeconomic Determinants of NPLs
Using an Extended Sample
and Dominance Analysis
George Sfakianakis, George M. Agiomirgianakis, and George Manolas
Abstract This chapter aims at revisiting the empirical literature on the deter-
minants of Non-Performing Loans (NPLs) using an extended dataset of selected
OECD countries (augmented by EU countries not yet members of the OECD) and
the latest data available for “traditional” macroeconomic variables with the addition
of variables only recently proposed and not yet adequately tested. We endeavor to
measure the effect of these determinants, but even more so for specific variables
for which no clear consensus exists in the preexisting literature as for the direction
of their impact. Our panel data specifications performed quite well, allowing us to
address two additional research questions; whether the recent financial/economic
crisis has changed the magnitude of the impact of the determinants of NPLs while
also quantifying the relative importance of each determinant using the analytical
tool of Dominance Analysis. The macroeconomic approach we opt for regarding
the determinants of NPLs explains a more than satisfactory part of the variability
of the dependent variable, while the crisis seems, as expected, to have affected
the magnitude of the impact for most of the regressors. Last but not least, the
unemployment rate and the degree of financial intermediation are topping the list
of most important determinants followed by lending rates.
Keywords Non-performing loans · Panel data estimation · Dominance analysis
The views expressed in this paper do not necessarily reflect those of the Hellenic Ministry of
Finance.
G. Sfakianakis ()
National and Kapodistrian University of Athens and Hellenic Open University, Athens, Greece
e-mail: gsfak@uoa.gr
G. M. Agiomirgianakis
Hellenic Open University, Athens, Greece
G. Manolas
Hellenic Ministry of Finance and Hellenic Open University, Athens, Greece
https://doi.org/10.1007/978-3-030-63970-9_20
286 G. Sfakianakis et al.
1 Introduction: Motivation of the Research
The problem of Non-Performing Loans1 has been drawing increasing attention

over the years, as it is a multivariate problem for policymakers/governments and
Regulating Authorities alike while also posing serious threats for social cohesion.
This is more so after the outbreak of the recent (2007/8) financial/economic crisis
which strongly highlighted the dual nature of the problem: on one hand, it is an
economic problem undermining the capital adequacy of financial institutions and
restricting their ability to contribute to credit expansion, while also often motivat-
ing/forcing governments to bail out failing institutions thus increasing public debt;
on the other, it is interwoven with social cohesion. Unemployment and/or falling
economic activity more often than not are identified among the reasons behind
increasing NPLs but, on the other hand, in many countries the measures to tackle the
problem (such as auctions and foreclosures) have backfired in the direction of social
cohesion (with problems arising partly from economic fundamentals, for example,
falling housing prices/value of collateral because of excess supply). Regarding the
business sector of the economy, a vicious circle could be clearly identified, as the
inability to service loans can easily be translated to falling economic activity or
failing firms and increased unemployment feeding back to NPLs.
Taking into account the complex nature of the problem and its persistence in
many countries, in this chapter we attempt to revisit the determinants of NPLs
empirical literature on the ground of a macroeconomic approach securing compara-
ble datasets for an extensive sample of countries also covering an adequately long
period of time. We have tried “traditional variables” (such as the unemployment
rate, economic activity, lending rates, the effect of fiscal stimulae), then adding
variables which only recently made it to the list (such as housing prices) and, as
a result, have not been adequately tried. With an extended sample of countries at
our disposal, we tried various combinations of variables, with special emphasis on
these with ambiguous effects (see Sect. 3). This is part of the contribution of this
chapter, with the rest coming from assessing the effect of the crisis and, last but
not least, from using Dominance Analysis to evaluate the relative importance of
individual determinants.
The structure of this chapter is as follows: Section 2 provides a selective review
of the literature, while in Sect. 3 a description of the data and potential regressors is
provided (along with a discussion of their potential impact). Section 4 describes the
methodology to be followed by the empirical results in Sect. 5. Section 6 concludes
also touching upon some relevant policy implications.
1 Throughout the paper, we will use this term as used in the source of our data (Worldbank) although
the term Non-Performing Exposures is also widely used (if not more, e.g., for EU countries).
Macroeconomic Determinants of NPLs Using an Extended Sample. . . 287
2 Selective Literature Review
As mentioned above, the interest of policymakers, regulators, and researchers

in Non-Performing Loans had been increasing even before the outbreak of the
last financial/economic crisis; however, it goes without saying that this interest
culminated during the crisis and the period of the subsequent recovery.
As far as the determinants of NPLs are concerned, the related literature is basi-
cally three-pronged: some researchers focus on macroeconomic factors (“systemic
factors” as they are often called in the literature), while others opt to investigate
microeconomic factors, i.e., factors related to the specific characteristics of banking
systems or individual institutions (often termed “idiosyncratic” factors). The third
strand of the literature typically attempts to combine both the aforementioned
factors in unified models.
Regarding the macroeconomic or “systemic” factors, the literature dates as back
as King and Plosser (1984), Kiyotaki and Moore (1997), and Bernanke, Gertler,
and Gilchrist (1998) to be followed (only indicatively) by Jimenez and Saurina
(2005); Pesaran, Schuermann, Treutler, and Weiner (2006) and Klein (2013),
while Lawrence (1995) and Rinaldi and Sanchis-Arellano (2006) are taking up the
implications of the life-cycle hypothesis. Espinoza and Prasad (2010) and Klein
(2013) added the exchange rate to potential determinants to be followed by Louzis,
Vouldis, and Metaxas (2012), Beck, Jakubik, and Piloiu (2013), Klein (2013), and
Nkusu (2011) being interested in the cost of credit and inflation. Share prices were
incrementally added by Beck et al. (2013) while Reinhart and Rogoff (2010), in a
highly influential paper, linked banking crises to sovereign debt crises and individual
fiscal factors.
The microeconomic factors strand of the literature basically starts with Berger
and De Young (1997) to be followed by Berg, Forsund, and Jansen (1992), Hughes
and Mester (1993), Stern and Feldman (2004), Salas and Saurina (2002), Rajan
(1994), Čihák (2007), and Jakubík and Sutton (2011).
As far as the literature combining macroeconomic and microeconomic factors,
significant contributions include (only indicatively again) Fernandez de Lis, Mar-
tinez Pagιs, and Saurina (2000), Louzis et al. (2012), Fofack (2005), Espinoza and
Prasad (2010), Boudriga, Taktak, and Jellouli (2009), and Anastasiou, Louri, and
Tsionas (2016).
Excellent surveys on the determinants of NPLs include, but are not limited to,
Manz (2019) and Nikolopoulos and Tsalas (2017).
The empirical literature includes important papers such as Castro (2013); Louzis
et al. (2012), Baltagi (2001), Quagliariello (2007), along with numerous papers
focusing on specific countries or group of countries (e.g., Rinaldi and Sanchis-
Arellano (2006) focusing on the Eurozone, Glen and Mondragón-Vélez (2011)
using a sample of 22 countries).
3 Data and the Model
Based on insights from the relevant literature mentioned above, this chapter
focuses on the first approach, i.e., aims at assessing and evaluating the relative
effects of macroeconomic or “systemic” variables. This option is mainly based
on data availability for a relatively large sample of countries. Microeconomic data
pertaining to the banking systems or even individual banking institutions are not
only scarce (if available at all) for many countries or longer time periods but, more
importantly, are hardly comparable (both across countries and over time).
The countries we use in our sample are mostly OECD members with three
qualifications:
• We have excluded four OECD member countries (Chile, Colombia, Mexico, and
Turkey) because of data limitations which would subsequently limit the overall
number of observations available for the empirical estimates.
• On the other hand, we have added Bulgaria, Cyprus, Malta, and Romania which
are EU members but not (yet) OECD members.
• We have also included aggregates such as the Euro area, EU-28, and OECD total
for which data were readily available and reliable.
The time span of the empirical estimates is the 2005–2018 period (the longest
period for which data for the dependent variable NPLs are available) thus allowing
us to differentiate results between the pre-crisis period and the one after its outbreak.
Based on the findings of previous research, the variables we chose to experiment
with as potential determinants of NPLs are:
• Real GDP (with a negative correlation with NPLs a priori expected).
• Real GDP growth (with a negative correlation with NPLs a priori expected).
• The unemployment rate (rising unemployment is a priori expected to result in
higher NPLs).
• The tax burden (measured by total tax receipts excluding social security
contributions—see below for its expected impact).
• Inflation (which could be thought as improving the willingness for loan repay-
ment since inflation is always considered to be in favor of the borrower through
the real value of loan installments).
• Housing prices used as a proxy for the value of collateral of loans: based on the
literature, the effect of these prices on NPLs is not always clear; one view is that
when house prices rise, this may raise collateral value (and as a result, NPLs
would be reduced), while an alternative view is that increasing house prices may
give rise to issues of moral hazard and adverse selection, thereby leading to an
overall increase in NPLs and greater accumulation of risky assets within banks
(see Chen and Fan (2019) for a comprehensive analysis).
• Lending interest rates (a negative correlation with NPLs is a priori expected,
mainly through the channel of increased amortization payments for loans with a
variable rate).
• Market capitalization of listed domestic companies as a ratio to GDP (a priori

expected to be negatively correlated with NPLs).
• Domestic credit to private sector as a ratio to GDP (expected to behave as market
capitalization).
• Public debt (% of GDP—see below for a brief discussion of its expected impact).
• Public sector net lending (+)/net borrowing (−) (% of GDP—again see below
for a brief discussion of its expected impact).
• The Real Effective Exchange Rate could be used to capture the effect a change
of the exchange rate of the local currency could have on the dynamics of NPLs.
Some of the variables are not meant to be used simultaneously but rather
interchangeably; for example, market capitalization of listed domestic companies
and domestic credit to private sector are both used in the literature as potential
proxies for the degree of financial development of a country. To a certain degree, this
could be the case for GDP/GDP growth rate and the unemployment rate all aimed
at capturing the trend and fluctuation of economic activity (with unemployment,
however, additionally capturing individual characteristics of borrowers). Along the
same lines, the public sector debt (or, for that matter, its annual change) and public
sector borrowing requirements are expected to grasp the degree of a potential fiscal
stimulus. The impact of the fiscal stimulus on NPLs is ambiguous; on one hand,
it could result in higher incomes (thus, alleviating “pressure” on NPLs) but, on
the other, it could be associated with a crowding-out effect of the private sector
through pressure on the money market and higher lending rates. The same holds for
the tax burden, which could act as a fiscal stimulus when lowered but could also
result in higher borrowing requirements and subsequent pressure on interest rates.
For these two fiscal stimulate, apart from the crowding-out effect, we could also
discuss about a potential Ricardian Equivalence effect feeding back to the decisions
of economic agents through expectations, as a discretionary expansion could be
perceived as resulting in higher public debt payments in the future (and higher taxes
and/or interest rates).
For reasons of comparability, the source for all variables is the Worldbank
database, with the exception of housing prices extracted from the OECD database.
4 Methodology
The empirical part of this chapter consists of three separate but intertwined parts of
analysis: First, we endeavor to pinpoint the determinants of NPLs and the direction
of their impact (especially for those variables which are characterized by ambiguity
in the relevant literature).
The model specifications which were eventually chosen with statisti-
cal/econometric criteria in order to explain the variability of NPLs are presented in
Sect. 5.1. We should note that, before concluding, various alternatives were tried, as
per: (1) the combination of variables, (2) econometric methods.
Regarding the latter, eventually, the equations were estimated using Panel
EGLS,2 with country weights and diagonal correction of standard errors for
heteroscedasticity and autocorrelation (using the methodology of White). Specifi-
cations with both fixed and random effects were tried, but their performance was
relatively inferior based on the usual statistical/econometric criteria. Also, apart
from allowing for a different residual variance for each cross-section (captured
by country weights), there is no indication that the data structure is characterized
by period-specific heteroskedasticity, contemporaneous covariances, and between-
period covariances (given, in any case, the relatively small time dimension).
Based on one of our preferred specifications on the determinants, we then try to
estimate whether each one of these determinants had a differentiated effect before
and during/after the crisis using dummy variables for each one of the regressors.
Last but not least, we use the analytical tool of Dominance Analysis to assess the
relative importance of a chosen set of determinants.
5 Empirical Results
Results of the Panel Data estimations are presented in Sect. 5.1, to be followed
by results for the effect of the crisis (Sect. 5.2) and the results of the Dominance
Analysis technique (Sect. 5.3).
5.1 Panel Estimation Results
In this section, we present our two preferred specifications—the main difference

between them being the inclusion or not of housing prices (along with choosing, in
some cases, different variables from the “pairs” explained in Sect. 3). As mentioned
above, housing prices is one of the latest additions to the list of determinants in the
relevant literature, but data are not available for all the countries in the sample (or all
years for that matter) thus restricting the available span of observations. However,
we decided to present one specification with housing prices included as we deemed
it important to provide relevant empirical evidence as a contribution to the debate
about the impact of this variable, i.e., whether the “collateral effect” prevails over
the “moral hazard effect” or vice versa.
The results for the specification without housing prices is presented in Table 1.
The overall fit of the model is very good, with the combinations of independent
variables explaining a significant part of the variance of the dependent variable
(as shown by the corrected R2 and the tests on its statistical significance using the
F-statistic). All estimators are statistically significant at conventional significance
2 See Baltagi (2001) for a relevant analysis.

Table 1 Panel Data estimation on the determinants of NPLs

Constant −0.855923 1.338094 −0.639658 0.5266
Unemployment 1.237773 0.074379 16.64144 0.0000
rate
Lending rates 0.527338 0.123919 4.255491 0.0001
Tax burden 0.103424 0.023885 4.330094 0.0001
Inflation −0.728078 0.086312 −8.435390 0.0000
Change in 0.051073 0.004194 12.17755 0.0000
public sector
debt
Domestic credit −0.037005 0.005121 −7.226263 0.0000
Real GDP −0.192272 0.048762 −3.943055 0.0004
growth
Weighted statistics
R-squared 0.965262 Mean 2.469894
dependent var
Adjusted 0.958315 S.D. 5.713356
R-squared dependent var
S.E. of 0.878226 Sum squared 26.99481
regression resid
F-statistic 138.9366 Durbin- 1.210213
Watson
stat
Prob 0.000000
(F-statistic)
levels (more specifically at the 1% significance level). As for the impact of each
one of them, rising unemployment and lending rates seem to contribute to higher
NPLs as is the case of the rising tax burden. Economic growth alleviates rising
NPLs while Inflation works in favor of the borrower (as explained above). As for
the fiscal stimulus a “crowding-out” effect seems to be in place (possibly working
not only through lending rates, which are included, but also through expectations
and a possible “Ricardian Equivalence” effect—see Sect. 3). Finally, as the financial
system develops further (or becomes more “sophisticated”) NPLs tend to be lower as
a ratio to total lending (the effect of the proxy “domestic credit as % of GDP”). The
explanation is twofold: along this process, banks would tend to exercise enhanced
“due diligence” when granting loans; on the other hand, it could be the case that
moral hazard issues could be more easily alleviated, for example, it would be easier
to track down borrowers being able but not willing to fulfill their obligations.
The results for the specification including housing prices are presented in Table 2.
Again the overall fit of the model is very good, with all estimators being statistically
significant at levels of significance less than 5%. The impact of unemployment,
lending rates, the tax burden, and the level of financial intermediation (financial
development—here better captured by market capitalization as a ration to GDP)
Table 2 Panel Data estimation on the determinants of NPLs (cont.)

Constant −4.463940 1.451529 −3.075336 0.0029
Market −0.018855 0.004077 −4.624779 0.0000
capitalization
Unemployment 0.965571 0.085681 11.26933 0.0000
Lending rates 0.316764 0.052962 5.980972 0.0000
Tax burden 0.070456 0.032076 2.196535 0.0311
Inflation −0.308495 0.077333 −3.989169 0.0001
Public sector −0.219655 0.059175 −3.711952 0.0004
net lending
Housing prices 0.039115 0.008666 4.513579 0.0000
Weighted statistics
R-squared 0.876637 Mean dependent var 5.047262
Adjusted
R-squared 0.865423 S.D. dependent var 7.186994
S.E. of
regression 2.192685 Sum squared resid 370.2059
F-statistic 78.16798 Durbin-Watson stat 0.467329
Prob
(F-statistic) 0.000000
are as explained in the previous specification. However, it is noteworthy that the

fiscal stimulus (here better captured by the borrowing requirements of the public
sector) seems to alleviate the increase of NPLs. In any case, the differentiated
performance of the two alternative fiscal variables is a research question open to
further investigation. It should also be underlined that both the sign and the statistical
significance of Housing prices point to the direction of a “moral hazard” effect.
5.2 Results for the Impact of the Recent Crisis
Based on the second one of our preferred specifications, we attempted to assess

whether the impact of each one of the determinants is different in the period before
the crisis and during/after that. We set the break in year 2010 (and not at the
theoretical beginning of the crisis 2007 or 2008) as by 2010 the impact of the crisis
on economic activity, unemployment as well as monetary variables such as interest
rates had become more prevalent in most countries. We should also note that we
deemed it important to use the second of our specifications in order to assess also
the effect of housing prices over the crisis period as in many cases the symptoms of
a “housing bubble” were thought to have been present.
The results only for the dummy estimators for each of the determinants are
presented in Table 3.
Table 3 Assessing the effect of the crisis

Market capitalization −3.766000 1.615467 −2.331214 0.0226
Unemployment −0.017532 0.005626 −3.116133 0.0027
Lending rates 0.185958 0.211505 0.879215 0.3823
Tax burden 0.280463 0.131179 2.138016 0.0360
Inflation −0.333682 0.066127 −5.046063 0.0000
Public sector net lending 0.099606 0.218715 0.455417 0.6502
Housing prices −0.419973 0.169527 −2.477326 0.0157
Market capitalization 0.040895 0.013193 3.099691 0.0028
As we can see, for all variables except for the lending rate and the borrowing
requirements of the public sector a differentiated impact of the specific determinants
is detected, including the effect of housing prices (for which the impact is mitigated
during/after the crisis compared to the period before).
Overall, however, a Likelihood ratio test on the inclusion of the whole set of
dummies shows that we should include all of them in the regression.
5.3 Results from Dominance Analysis
In this section, we attempt to determine the relative importance of the potential

determinants of NPLs using dominance analysis. Building on the insights of
previous contributions (among many others, see Bishop, Chakraborti, and Thistle
(1988), Azen and Budescu (2003), Sfakianakis, Georgopoulos, and Papadogonas
(2016)), we can use the criterion of both general and rescaled dominance for the
ranking and scaling of the importance across all predictors in a regression. In
principle, general and/or rescaled dominance both determine the relative importance
based on the incremental difference in the R2 (R2 ) observed by adding a predictor
to all possible subsets of the remaining predictors. Using this methodology, we
obtain the results in Table 4.
Using the criterion of rescaled dominance (as is usually the case in the relevant
literature) we have a clear “winner” among the potential determinants of NPLs,
which is the unemployment rate, followed by the degree of development of the
financial system (financial intermediation) and lending rates.3
3 We should note here that because of computational complexity we chose only 5 out of 7 regressors
to be included in the Dominance Analysis based on the estimated explanatory power of each one
of them in previous specifications.
6 Conclusions and Policy Implications
Using an extended dataset of selected OECD countries (adding some EU Member

States not yet members of the OECD) for the longest possible time span (restricted
only by data availability, i.e., the 2005–2018 period) we attempted in this chapter
to revisit the determinants of NPLs empirical literature. After trying various
combinations of candidate variables (12 in total) we ended up in specifications
which feature unemployment, economic activity measures, the degree of financial
intermediation, lending rates, the tax burden imposed on the economy, the fiscal
stimulus, and housing prices (used as a proxy of the value of collateral for loans
granted). Our preferred specifications perform quite well explaining a more than
satisfactory part of the variability of the dependent variable while regressors have
the expected signs. As for the determinants with unclear expected signs, the fiscal
stimulus gives mixed results depending on the specific variable used (with a possible
crowding-out/Ricardian Equivalence effect present in one of the specifications)
while housing prices point more towards a “moral hazard” effect. The crisis seems
to have affected the magnitude of the impact of the determinants while, regarding
the relative importance of each one of them, the unemployment rate and the depth
of financial intermediation top the list followed by lending interest rates.
The above empirical conclusions also provide some possibly useful insights
for policymaking purposes: tackling unemployment should be a priority—not
necessarily through fiscal stimulae which have questionable effects but, for example,
through structural reforms resulting in a more efficient functioning of the labor
Table 4 Results from dominance analysis

Average R-square across subsets
X1 X2 X3 X4 X5
Market Lending
K capitalization Unemployment rates Inflation Houseprices
0 0.3480 0.6890 0.1610 0.0260 0.0000
1 0.2608 0.5525 0.0998 0.0443 –0.0002
2 0.2010 0.4367 0.0905 0.0720 –0.0002
3 0.1195 0.3350 0.1215 0.0508 –0.0178
4 0.0940 0.3680 0.3080 0.0490 0.0560
General
dominance 0.2047 0.4762 0.1562 0.0484 0.0076
Rescaled
dominance 22.9171 53.3296 17.4860 5.4199 0.8473
market.4 Also, a more efficient functioning of the money and capital markets
(enhanced quality of financial intermediation through institutional and legislative
interventions) would be desirable as it could work through two supplementary
channels: on one hand, through promoting a better “screening” of borrowers and/or
alleviating phenomena of moral hazard and, on the other, possibly through lower
interest rates as a result of enhanced competition between banking institutions.
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Aspects of Financial Accounting
and Managerial Accounting Outputs
in Connection with the Decision-Making
Processes of Accounting Units
Markéta Šeligová
Abstract The aim of this chapter is to evaluate how information from financial
accounting statements and managerial accounting outputs determine the economic
and financial position of accounting entities in the Czech Republic in the context of
identifying factors that may affect the amount of profit. This is mainly the cash con-
version cycle (including accounts receivables, accounts payables, and inventory),
financial assets, and financial debt. In order to fulfill the aim of this chapter, the
method of comparison and the generalized method of moments (GMM method)
will be used. The data sample will include data for the period 2007–2018. The
analysis will include companies operating according to the CZ-NACE classification
in manufacturing industry and in the Czech Republic. We used a sample of 3645
manufacturing companies. Using the comparison method and the GMM method
was found a statistically significant relationship between the indicators affecting
the profit of the company such as cash conversion cycle, financial assets, financial
debt, and the gross operating profit and economic value added in manufacturing
companies in the Czech Republic. It was also found that the determination of the
financial position of companies in the manufacturing industry is distorted within
the information from the financial accounting statements in comparison with the
outputs of managerial accounting.
Keywords Cash conversion cycle · Economic value added · Financial

accounting · Financial assets · Financial debt · Gross operating profit ·
Managerial accounting
M. Šeligová ()
Department of Finance and Accounting, School of Business Administration in Karviná, Silesian
University in Opava, Karviná, Czech Republic
e-mail: seligova@opf.slu.cz
https://doi.org/10.1007/978-3-030-63970-9_21
298 M. Šeligová
1 Introduction
An entity records the course of its business in financial accounting, which is based
on the legislative framework of the country. The goal of every business entity is
mainly to create or generate an adequate amount of profit and then find out how to
ensure this profit over a longer period of time. However, it must also be assumed
that the company’s managers must make individual managerial decisions during
the production process, mainly related to the production of their products and their
optimal profitability (profitability).
Business managers can ensure the profitability of their products through man-
agerial decisions regarding the optimal combination of the cash cycle and by
keeping the amount of inventories, receivables, liabilities, financial assets, and
indebtedness at an optimal level. However, for a certain managerial decision,
the company’s managers need relevant information (with a high telling ability),
which corresponds to the actual course of the production process. This information
cannot be unambiguously obtained from financial accounting statements, where
the information of the business process is recorded according to the legislative
framework and does not correspond to the actual course of the production process.
Economic and financial information obtained from financial accounting state-
ments can be extended by information from the outputs of managerial accounting,
which captures economic and financial information not according to the legislative
framework, but according to the actual course of the production process. At the
moment, there is a different determination of the economic and financial position of
the entity in the Czech Republic, both from the statements of financial accounting
and from the outputs of management accounting.
Within the context of the financial and economic position of entities, the issue
of generating and generating profit is particularly important. Subsequently, it is
necessary to monitor which factors affect the profit of entities and which factors
affect profit. If an enterprise manufactures products, it must first purchase material to
manufacture the products. In this case, the company records an increase in liabilities.
It then converts the input material into inventories, which it then sells and converts
those inventories into receivables. Through this process, it is able to generate profit.
A company’s receivables are related to a certain level of sales that the company
should receive from its customers, while liabilities are related to a certain level of
costs that the company has to bear. As part of generating profit, it is important for the
company to monitor inventories, receivables, and liabilities and then also the value
of the debt or financial assets. For this reason, inventories, receivables, payables,
financial assets, and indebtedness can be expected to affect the company’s profit.
Based on the above, the aim of this chapter is to evaluate how information from
financial statements and managerial accounting outputs determine the economic and
financial position of entities in the Czech Republic in the context of identifying
factors that may affect the amount of profit.
In order to achieve the aim, the following research questions will be identified
and evaluated:
Aspects of Financial Accounting and Managerial Accounting Outputs. . . 299
• How does information from financial accounting statements and managerial

accounting outputs determine the economic and financial position of companies
in the manufacturing industry in the Czech Republic?
• What factors influence the profit of companies in the manufacturing industry in
the Czech Republic?
• What is the relationship and influence of analyzed factors on the profitability of
companies operating in the manufacturing industry in the Czech Republic?
2 Literature Review
Chary, Kasturi, and Kumar (2011) examined the impact of working capital and
liquidity on the profitability of companies operating in the pharmaceutical industry.
The analyses included data for the period 2003–2008. Using correlation analysis,
regression analysis, and the Chi-square test, they found a negative effect between
inventory growth and corporate profitability. If the company’s inventory increases,
the company will face reduced profitability. If a company has a significant amount
of working capital, it is likely to lead to a decrease in profitability. Conversely, low
working capital levels can contribute to deteriorating liquidity.
Gołaś, Bieniasz, and Czerwińska-kayzer (2013) investigated the relationship
between working capital (cycles of inventories, receivables, liabilities, and cash
conversion cycle) and corporate profitability of Polish companies. The analysis was
carried out for the period 2005–2009. The results indicate that companies operating
in the sectors with the shortest cycles mentioned above are achieving the highest
profitability. Using regression analysis, it was found that if the working capital cycle
is shortened, it will result in an increase in corporate profitability.
Makori and Jagongo (2013) analyzed the impact of working capital management
on the profitability of companies in Kenya for the period 2003–2012. In their study,
the authors used panel data from five manufacturing and construction companies.
Pearson’s correlation coefficient and regression analysis (Ordinary Least Squares)
was used to determine the relationship between working capital and corporate
profitability. A negative relationship between profitability and the number of days’
accounts receivable and cash conversion cycle was demonstrated. On the other hand,
a positive relationship between profitability and number of days of inventory and
number of days of payable was demonstrated. In addition, they also found that
financial leverage, sales growth, current ratio, and firm size also have a significant
impact on corporate profitability.
Ukaegbu (2014) examines the relationship between working capital efficiency
and the profitability of manufacturing companies for the period 2005–2009. A panel
negative regression analysis showed a significant negative relationship between
profitability (measured through net operating profit) and cash conversion cycles.
Managers can create value for their shareholders by striving to reduce the time it
takes for customers to pay their debts. They will also strive to sell their inventories
as quickly as possible and seek to defer payments to their suppliers.
300 M. Šeligová
Baños-Caballero, García-Teruel, and Martínez-Solano (2014) examined the link

between working capital management and business performance in the UK. The
existence of an optimal level of investment in working capital was found, which
balances the benefits and costs, and thus maximizes the value of the company. In
their study, they concluded that companies should avoid negative effects on business
performance due to loss of sales or additional financing costs.
Enqvist, Graham, and Nikkinen (2014) examined the relationship between work-
ing capital and corporate profitability in the context of business cycle developments.
The analysis was performed for the period from 2007 to 2008. A statistically sig-
nificant link was demonstrated between working capital and corporate profitability,
especially in times of economic recession. This relationship is more important in
view of the economic recession. Furthermore, it was found that efficient inventory
management and accounts receivables conversion periods increase during periods of
economic downturns. The authors concluded that it is important to manage working
capital and should therefore be included in selected financial plans and budgets of
companies.
Jayarathne (2014) believed that working capital management is a key part of
a company’s financial management and can fundamentally affect the company’s
profitability and liquidity. The author was based on the idea that optimal working
capital management contributes positively to the creation of company value. This
study focused on manufacturing companies for the period 2008–2012. It was found
that the profitability is negatively associated with the account receivable period,
inventory turnover period, and cash conversion cycle. Further, it was found that
the profitability is positively associated with the account payable period. The
results also showed that the increase in leverage leads to a decline in profitability.
Manufacturing companies can increase their performance and profitability by
appropriate working capital management.
The method of comparison will be used to evaluate how information from financial
and financial position of accounting units in the Czech Republic. The generalized
method of moments (GMM method) will be used in the context of identifying
factors that may affect the amount of the company’s profit from the point of view of
financial accounting statements and managerial accounting outputs. The data sample
will include data for the period 2007–2018. The analysis will include companies
operating according to the CZ-NACE classification in the manufacturing industry
in the Czech Republic. We used a sample of 3645 manufacturing companies. The
worldwide Orbis database was used for data collection, which contains data from the
annual reports of individual companies. All data were collected and subsequently
evaluated on an annual basis.
Table 1 Description of used variables for comparison method

Variables Calculation
Economic value added (EVA) Net operating profit after tax − cost of debt − cost of equity
Operating profit Operating revenue − operating expenses − tax
Total profit Revenue − expenses − tax
Return on equity Earnings after tax/equity
Alternative cost of equity Required return of shareholders, including the riskiness of the
business
Table 2 Description of used variables for GMM Method

Expected
Variables Calculation relationship
Gross operating profit (GOP) (Sales − cost of goods sold)/(total Dependent variable
assets − financial assets)
Economic value added (EVA) (Net operating profit after tax − cost Dependent variable
of debt − cost of equity)/total assets
Cash conversion cycle (CCC) (Number of days inventory + number −
of days receivables − number of days
payables)
Fixed financial assets ratio (FA) Fixed financial assets/total assets +
Financial debt ratio (debt) (Short term loans + long term −
loans)/total assets
Table 1 presents a description of the used variables for the comparison method.
This table includes variables such as economic value added (EVA), operating
profit, total profit, return on equity, and alternative cost of equity. Operating profit,
total profit, and return on equity are indicators that can be found from financial
statements. These indicators may distort the financial data of companies in the
manufacturing industry due to the drawing of data from financial accounting
statements that are based on the legislative framework. Economic value added
and alternative cost of equity are indicators that can be ascertained through the
results of managerial accounting, which is not governed by law and legislation and
provides a credible picture of the actual course of business and the actual financial
characteristics of companies in the manufacturing industry in the Czech Republic.
All variables used are characterized in Table 2. Gross operating profit and
economic value added are dependent variables. Cash conversion cycle (CCC), fixed
financial assets ratio, and financial debt ratio are independent variables.
Equation (1) is a calculation that can be used to determine the value of the cash
conversion cycle. In other words, using this equation, the cash conversion cycle can
be calculated.
302 M. Šeligová
CCC = number of invetory + number of receivables − number of payables

(1)
Inventory
Number of inventory = × 365 (2)
Cost of Goods Sold
Receivables
Number of receivables = × 365 (3)
Sales
Payables
Number of payables = × 365 (4)
Cost of Goods Sold
The term operating cycle is encountered in the management of inventories,
receivables, payables, and cash. You need to invest money in production—without
money, a company cannot produce. For money, he buys production inputs to start
production (raw materials, materials) and after the end of production sells finished
products to the customer. The customer pays for these products. This is the operating
cycle where the funds invested at the beginning are returned to the company at the
end.
The product can remain in different states:
• Material
• Unfinished product,
• Finished product
• Receivable
The length of the operating cycle is the total time when cash is tied up in the
company in the form of non-monetary assets. This time is also called the turnaround
time.
We distinguish here:
• Material turnover time
• Turnover time of work in progress
• Turnover time of finished products
• Receivables turnover time.
The cycle turnaround time is then obtained as the sum of the individual
turnaround times. The financial cycle is closely related to the operating cycle. This
financial cycle begins with the first cash issue that occurs when the invoice for the
material is paid. It is therefore shorter than the operating cycle by the time of the
turnover of liabilities.
The GMM method will be used to determine the relationship between the
company’s profitability and the factors influencing the company’s profit. Prucha
(2014) sees the advantage of this method in that the data is arranged in panel
data and can be part of a shorter time series. This is an advantage over the least
squares method, where it is recommended to use a longer time series. However,
Prucha (2014) sees the disadvantage in that the data cannot be tested in the same
way as with the least squares method (such as heteroskedasticity, autocorrelation,
normality, multicollinearity, and stationarity).
All variables and observed relationships between them will be tested at 1%,
5%, and 10% significance levels. All identified relationships within the individual
models will be confirmed and verified using the Sargan/Hansen test (J-test). The
model will be robust if the Sargan/Hansen test value is greater than 0.05. This means
to what extent it is possible to achieve the same conclusions (results) under this
method under the load of individual parameter changes.
To determine the relationship between the company’s profitability and the factors
influencing the abovementioned company profit, we use the Cohen and Cohen
(2014). Its form is given in the following equation:
Lit = α1 + β1 ∗ ΔLit−1 + β2 ∗ X1it + β3 ∗ X2it + . . . . . . .. + βn ∗ Xnit + εit

(5)
The dependent variable Lit is the profitability of companies in the manufacturing

industry in the Czech Republic at time t; Lit−1 is delayed dependent variable; Xnit
are indicators that can affect the level of profitability of companies such as cash
conversion cycle (CCC cycle), financial assets, and financial debt; β 0 and εt is model
constant and the residual component in the model.
4 Result and Discussion
This part focuses on the results of the comparison method and the generalized
method of moments and their comments. Using a comparison method, we can
evaluate how information from financial accounting statements and management
accounting outputs determine the economic and financial position of accounting
units in the Czech Republic in the context of identifying factors that may affect the
amount of profit.
From Fig. 1 we can see the development of Economic Value Added, Operating
Profit, and Total Profit in the manufacturing industry in the Czech Republic from
2007 to 2018. From the financial statements can be found only the development
of Operating Profit and Total Profit in the manufacturing industry in the Czech
Republic. We see that companies in the manufacturing industry generate profit.
Operating Profit and Total Profit show an almost growing trend after 2009. After
2017, however, Operating Profit and Total Profit are declining. In general, it can be
stated that companies in the manufacturing industry generate profit, which can be
considered a positive feature of the company’s management.
304 M. Šeligová
250000000
200000000
150000000
100000000
50000000
0
-50000000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
-1E+08
Economic Profit (EVA - Economic Valued Added)

Operating Profit
Total Profit
Fig. 1 Development of Economic Value Added, Operating Profit, and Total Profit in manufactur-
ing industry in the Czech Republic from 2007 to 2018
However, if we focus on the outputs of managerial accounting, where man-

agers do not work only with information according to state legislation, but with
information that corresponds to the real course of business activities. Economic
Value Added (EVA) presents just that information that corresponds to the real
course of business activity. According to Fig. 1, we can see that although the
company’s profit (Operating Profit and Total Profit) is growing and reaching
acceptable values, Economic Value Added until 2013 reaches negative values. This
means that companies do not create value for shareholders and are not able to
finance the cost of debt and the cost of equity from operating profit at the same
time. Thus, financial accounting statements show that companies make a profit, but
Economic Value Added signals a very inefficient business activity of companies
in the manufacturing industry. It can be considered positive that Economic Value
Added is growing after 2013 and is reaching positive values. This means that
companies in the manufacturing industry create value for shareholders.
Another difference in the explanatory power of financial accounting statements
and managerial accounting outputs can also be seen in Fig. 2.
Figure 2 shows the Development of Return on Equity and Alternative Cost
of Equity in the manufacturing industry in the Czech Republic from 2007 to
2018. Based on Return on Equity, we can find out how the company values the
shareholders’ funds. We see that this indicator had a growing tendency during
the analyzed period. This fact can be considered positive. The Return on Equity
indicator can be calculated using financial statements. On the contrary, Alternative
Cost of Equity is based mainly on the outputs of managerial accounting and the
conclusions differ significantly from the conclusions associated with the Return
on Equity indicator. We see that the alternative cost of equity decreases during
0.2
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Return on Equity (ROE) Alternative Cost of Equity
Fig. 2 Development of Return on Equity and Alternative Cost of Equity in the manufacturing
industry in the Czech Republic from 2007 to 2018
the analyzed period. This means that the demand for capital appreciation from
shareholders is decreasing. However, until 2013, these alternative cost of equity
were significantly higher than the return on equity. This means that companies in
the manufacturing industry in the Czech Republic were not able (using the return
on equity indicator) to value the capital invested by shareholders enough to pay the
required return to shareholders who invested in the business.
Using the comparison method, we can evaluate how information from financial
and financial position of accounting units in the Czech Republic. Using the
Generalized Method of Moments (GMM method), we can find out which factors can
affect the amount of profit of the company. For this reason, the Generalized Method
of Moments (GMM method) will be used to determine the resulting relationship
between profit enterprises and indicators such as cash conversion cycle (CCC cycle),
financial assets, and financial debt in the manufacturing industry in the Czech
Republic.
Table 3 presents GMM method results between profitability of companies in
the manufacturing industry and indicators such as cash conversion cycle, financial
assets, and financial debt based on information from financial accounting state-
ments.
The results of the GMM method showed a statistically significant relationship
between gross operating profit and independent variables such as gross operating
profit overhang, cash conversion cycle, financial assets, and financial debt. All
identified relationships between variables were tested and subsequently confirmed
306 M. Šeligová
Table 3 GMM method results between the profitability of companies in the manufacturing
industry and indicators such as cash conversion cycle, financial assets, and financial debt based
on information from financial accounting statements
Variables Delayed variable CCC FA Debt J-statistic
GOP 0.2454 −0.1133 0.3280 −0.0487 32.2569
Probability (0.0000) (0.0000) (0.0000) (0.0000)
Source: Authors’ calculations
at a significance level of 1%. The robustness of the models was demonstrated using
the Sargan/Hansen test.
Within this research, it was found that the gross operating profit of the previous
period has a positive effect on the gross operating profit of the current period of
individual companies. The profit generated by the previous period of the company
contributes to the creation of financial resources that companies can use for the
production and subsequent sale of their products. Thus, in accordance with the
theoretical basis, a positive effect between the gross operating profit of the previous
period and the gross operating profit of the current period is demonstrated. The
regression coefficient is 0.2454, which means that if the company increases the gross
operating profit of the previous period by one unit, the company records an increase
in gross operating profit by one unit in the current period.
Financial assets also have a similar development trend. The GMM method
showed a positive statistical effect on gross operating profit. If companies grow their
financial assets, they will have the money to invest in production and subsequently
generate a profit. Based on a regression coefficient of 0.3280, it can be said that if
companies increase their financial assets by one unit, the gross operating profit will
increase by 0.3280 units.
On the contrary, completely opposite development tendencies and links were
demonstrated in the relationship between gross operating profit and variables such
as cash conversion cycle (CCC) and financial debt. If businesses grow and become
more indebted, they will have to repay credit liabilities in the form of interest costs,
reducing their profits. The same will be true for the cash conversion cycle. If the time
taken for companies to convert material and finished products into cash increases,
their profits will decline.
These conclusions are found on the basis of information from the financial
accounting statements analyzed by companies in the manufacturing industry in
the Czech Republic. The information from the financial accounting statements is
based on the legislation of the state and may not correspond to the real course of
the production process and business activities of companies in the manufacturing
industry in the Czech Republic. Therefore, based on low explanatory power,
the following table shows the relationship between economic value added and
indicators such as cash conversion cycle, financial assets, and financial debt based
on information from managerial accounting outputs, which provides a more realistic
view of business development.
Table 4 GMM method results between economic value added of companies in manufacturing
industry and indicators such as cash conversion cycle, financial assets, and financial debt based on
information from managerial accounting outputs
Variables Delayed variable CCC FA Debt J-statistic
EVA 0.6937 0.3572 −0.1252 −0.0625 40.9407
Probability (0.0000) (0.0000) (0.0000) (0.0000)
From Table 4 we can see, statistically significant independent variables are

economic value added of previous period (regression coefficient +0.6937), cash
conversion cycle (regression coefficient 0.3572), financial assets (regression coeffi-
cient −0.1252), and debt (regression coefficient −0.04625).
Table 4 shows that the dependent variable is economic value added (EVA). This
indicator characterizes the output of managerial accounting in comparison with
gross operating profit, which characterizes the outputs of financial accounting. It
can be stated that all analyzed variables were statistically significant, and thus have
an effect on the amount of economic value added. These are cash conversion cycle,
financial assets, debt, and economic value added previous period.
Economic value added previous period and cash conversion cycle have a positive
effect on economic value added. If companies increase the cash conversion cycle,
economic value will grow. This may be due to the fact that if companies reduce
the time it takes to pay their liabilities, this will be reflected in the growth of funds
that can contribute to profit generation. A similar link was also found for variable
such as economic value added of the previous period. If this indicator increases, the
economic value added current period will increase.
Conversely, a decline in financial assets and financial debt will cause an increase
in economic value added. If companies become indebted, the company will incur
interest costs that are part of the economic value added. Of course, if a company has
to constantly bear rising interest costs, economic value added will decline.
If we compare the results of the GMM method within financial statements and
managerial accounting statements, we can see the same but also different features.
Among the common features is the fact that the same statistically significant
variables were published in both models. However, in comparison with both models,
indicators such as cash conversion cycle and financial assets have a different
effect. In the first model (Table 3), a negative relationship between cash conversion
cycle and economic value added and a positive effect between financial assets
and economic value added were demonstrated. In the second model (Table 4),
the opposite effects were demonstrated. Cash conversion cycle positively affects
economic value added and financial assets negatively affect economic value added.
308 M. Šeligová
5 Conclusion
The aim of this chapter was to evaluate how information from financial accounting
statements and managerial accounting outputs determine the economic and financial
position of accounting units in the Czech Republic in the context of identifying
factors that may affect the amount of profit of the company. This is mainly the
cash conversion cycle (including accounts receivables, accounts payables, and
inventory), financial assets, and financial debt. In order to fulfill the aim of this
chapter, the method of comparison and the generalized method of moments (GMM
method) will be used. The data sample will include data for the period 2007–
2018. The analysis will include companies operating according to the CZ-NACE
classification in the manufacturing industry in the Czech Republic. We used a
sample of 3645 manufacturing companies.
The comparison method and the generalized method of moments (GMM method)
were used to evaluate how information from financial statements and management
accounting outputs determine the economic and financial position of entities in the
Czech Republic in the context of identifying factors that may affect the amount of
profit of companies. The data sample will include data from 2007 to 2017. The
analysis included companies operating according to the CZ-NACE classification
in the manufacturing industry in the Czech Republic. In this research, we used a
sample of 3645 manufacturing companies.
Using the comparison method, it was found that based on information from finan-
cial accounting statements, the financial and economic position of companies in the
manufacturing industry in the Czech Republic can often be distorted. Based on the
financial accounting statements, it was found that companies in the manufacturing
industry generate profit, but the outputs of management accounting showed that in a
certain period of time, companies did not create value for shareholders. Enterprises
in the manufacturing industry were not able to finance both the cost of debt and the
cost of equity from their profits.
Using the GMM method has found a statistically significant relationship between
the indicators such as cash conversion cycle, financial assets, financial debt, and
profitability of companies in manufacturing companies in the Czech Republic on
the basis of financial accounting statements. In this examination, the positive effect
of financial assets on gross operating profit was demonstrated. On the other hand, a
negative impact of the cash conversion cycle and financial debt on gross operating
profit was demonstrated in the GMM method.
On the other hand, using the GMM method has found a statistically significant
relationship between the indicators such as cash conversion cycle, financial assets,
financial debt, and profitability of companies in manufacturing companies in
the Czech Republic based on the outputs of managerial accounting. Within this
research, the positive effect of cash conversion cycle on economic value added
was demonstrated. On the other hand, a negative impact of the financial assets and
financial debt on economic value added was demonstrated in the GMM method.
All resulting relationships were tested at a statistical significance level of 1%. The
resulting relationships were confirmed using the Sargan/Hansen test (J-statistic),
which demonstrates the robustness of the model.
Acknowledgment This chapter ensued thanks to the support of the grant IGS/14/2020 “Aspects
of financial accounting and managerial accounting outputs in connection with the decision-making
processes of accounting units.”
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Movies Performance: Empirical Evidence
from Italy
Anna Maria Bagnasco
Abstract In this chapter, we partition all the movies released in Italy over a time
of 4 years (2016–2019) into groups with the aim to analyze their performance and
their characteristics.
Movies released are heterogeneous among them with respect to nationalities,
production costs, release strategies, gross box office collections, and the number of
screens dedicated. We use original data on all the movies released in Italy over the
years from 2016 to 2019 and, using cluster analysis, we identify four clusters of
movies, each characterized by different trends. The results allow us to investigate
and better understand some aspects of the movie sector in Italy and could suggest
areas where cultural policies could be strengthened.
Keywords Movie economics · Gross box office · Cluster analysis
JEL codes: C88, L82, L88
1 Introduction: An Overview on the Motion Picture
Every year more than 500 movies are released in our country over 12 months: on
average this implies more than one movie is released every day.
Generally, the number of movies released in a country does not correspond with
the number of movies produced. Movies released come from all over the world and
a big number of movies released are US labeled. In Table 1, we can read data both
on produced and released movies in Italy from 2016 to 2019, with emphasis on the
Italian and US movies released (ANICA, 2016, 2017, 2018, 2020; Cinetel, 2019).
A. M. Bagnasco ()
IULM, Milan, Italy
e-mail: annamaria.bagnasco@iulm.it
https://doi.org/10.1007/978-3-030-63970-9_22
312 A. M. Bagnasco
Table 1 Italian movie market: movies produced and movies released

Movies Movies
Italian movies released released ITA + Cop/Tot Movies
produced (total) (ITA + Cop) (%) released (US) US/Tot (%)
2019 – 495 193 38.9 130 26.2
2018 273 528 210 39.8 132 (135) 25.5
2017 235 536 218 40.6 154 28.7
2016 223 554 208 37.5 158 28.5
Source: ANICA, Cinetel
Table 2 % of gross box office and audience for Italian and US movies (2016–2019)
ITA + COP box ITA + COP US box office gross
office gross (%) audience (%) (%) US audience (%)
2019 21.22 21.56 65.16 64.26
2018 23.03 23.20 55.57 55.18
2017 17.64 18.28 66.28 65.12
2016 29.05 28.71 55.65 55.19
Source: ANICA
Table 3 % of revenues for top 10 and top 50 grossing movies

Total Movies: top Box office gross: Movies: top Box office gross:
movies 10 % top 10 % 50 % top 50 %
2018 528 1.89 23.70 9.40 56.40
2017 536 1.86 24.40 9.30 60.66
2016 554 1.80 28.20 9.02 62.89
2015 480 2.08 29.50 10.41 62.04
2014 470 2.12 18.80 10.63 57.36
2013 454 2.20 27.19 11.01 63.69
Source: own elaboration on data ANICA and Cinetel
Even if US movies released are less than Italian ones, they are those that collect
the highest percentage of box office gross and audience, as it is shown in Table 2.
Historically, the film industry is characterized by an exceptionally high degree of
concentration.1
This fact is confirmed also in our motion picture market. As Table 3 suggests, a
small number of movies collected the largest amount of box office gross.
In each considered year, the top ten grossing movies, that corresponds to the 2%
of total movies released, collected a box office gross between 19 and 30%.
A similar result emerges with respect to data on the top 50 grossing movies: a
percentage of around 10% of total movies released accounted for a box office gross
between 56 and 64%.
1 The often verified Murphy’s Law (named in honor of Art Murphy, US industry analyst) states that
20% of the movies earn 80% of the revenues.

Movies Performance: Empirical Evidence from Italy 313
There are also other aspects of the movie market well known and studied: the
US Major supremacy, the short movies’ exposure time, and the reduced choice of
available titles in the theaters.
A good part of the economic literature on the movie sector has suggested models
to forecast or understand movies’ success (Chang & Ki, 2005; Hofmann, Clement,
Völckner, & Hennig-Thurau, 2017; Lash & Zhao, 2015; Nasser, Al-Shawwa, &
Abu-Naser, 2019).
Recently also the theme of the relationship between social networks and word of
mouth has attracted a lot of attention by researchers (Kim, Park, & Park, 2013; Liu,
2006; Mohanty, Clements, & Gupta, 2018; Wang, Zhang, Li, & Zhu, 2010).
Our analysis is concentrated on the original data of movies released in Italy over
a period of 4 years.
This chapter is organized as follows: in Sect. 1 we present the data set and
methodology, in Sect. 2 we show the cluster analysis results and, finally, we discuss
the findings, the limitations of the analysis and we conclude.
2 Data Description and Methodology
We collected data (Cinetel, 2020) on box office gross for all the movies released
in Italy over a period of 4 years, from 2016 to 2019. The total number of movies
released throughout the whole country over the considered time was equal to 2483.
We had the list of all the titles released in each considered year with information on
the following items:
• Release company
• Release date
• Nationality
• First day box office gross
• First weekend box office gross
• First weekend screens
• First week box office gross
• Second weekend box office gross
• Second weekend screens
• Third weekend box office gross
• Third weekend screens
• Fourth weekend box office gross
• Fourth weekend screens.
Not all the items were available for each film in the data set.
The availability of information was not uniform among all the titles: due to
this fact we selected only the movies with complete data about the first four
programming week-ends. Available gross box office (GBO) data from the first to
the fourth weekend are those in Table 4.
314 A. M. Bagnasco
Table 4 Number of GBO by GBO_WE1 2294

weekend
GBO_WE2 1974
GBO_WE3 1807
GBO_WE4 1632
Table 5 Clusters results No. of Median

Cluster movies WE2/WE1 WE3/WE2 WE4/WE3
1 132 0.122 0.697 0.598
2 147 0.258 0.091 1.131
3 882 0.617 0.454 0.459
4 348 0.411 0.229 0.130
At the end, our sample included 1509 movies.

The available data are essentially the gross box office and the number of screens,
which are strongly correlated2 ; therefore, we choose to concentrate the analysis on
the trend of GBO.
We noted that, even if, generally, GBO’s movies decrease from the first to the
fourth weekend, the decline does not always occur in the same way.
Analyzing this particular aspect, we investigated how the movies GBO changes
from one weekend to the other one, over the four weekend available GBO movies.
The aim was pursued calculating the ratio of each weekend’s GBO on the
previous one. Starting from the second weekend, we obtained three ratios for each
movie: the ratio between the second weekend GBO on the first, the third on the
second, and the fourth on the third.
Although the GBO usually decreases, these ratios show strongly skewed distri-
butions; they are also concentrated on low values, as 90% of cases show that ratios
are included between 0 and 1.
As many statistical techniques are not valid for strongly skewed data, the
ratios have been transformed using the logarithm function, in order to obtain
approximately bell-shaped data.
Data have been submitted to cluster analysis with the k-means method with the
aim to generate four groups of movies with the maximum homogeneity within the
groups, while maximizing the heterogeneity among them. The four clusters are
summarized in Table 5. To improve interpretability, the medians of the true ratios
are displayed (not the logarithms).
The trends of the defined ratios are represented in Fig. 1.
2 Thecorrelation between GBO and screens number is always high and it grows regularly from
week-end 1 (r = .756) to week-end 4 (r = .843) over the considered time.
1.2
0.8
0.6
0.4
0.2
0
WE2/WE1 WE3/WE2 WE4/WE3
cluster 1 cluster 2 cluster 3 cluster 4
Fig. 1 From ratio to clusters
3 Clusters Description
Cluster analysis’ results will be given in this section. Initially, we focus on clusters
themselves, in order to stress their differences. Then, we aim to understand the
outcomes which have resulted from the investigation.
Cluster 1 counts for 8,7% of the movies’ sample, the second cluster counts for
9,7%, the third cluster counts for 58,4%, and, finally, the fourth cluster counts for
23,1%.
For each cluster we will describe:
• The GBO trend over the four weekends;
• The total GBO collected;
• The ratio between week-end GBO and total GBO;
• Movies nationality;
• Release company.
These are the features that in our analysis showed statistically significant
differences among clusters. Other features did not show significant differences.
In particular, movies distribution among clusters does not show any statistically
significant differences per year of release (χ 2 (9) = 9.24, p = .41) nor per month of
release (χ 2 (33) = 42.52, p = .12).
316 A. M. Bagnasco
3.1 GBO Analysis Results
The total amount of GBO over the four weekends for each cluster is represented in
Fig. 2 and Table 6.
In Fig. 2, we can observe that the clusters have a very different level of GBO3 :
clusters 3 and 4 have relatively high GBO, while clusters 1 and 2 show the small
ones.
Cluster 4 in the first weekend collects the highest box office. Starting from the
second weekend, the fourth cluster GBO decreases relatively steeply and we can
observe that the GBO leadership has been taken and maintained by cluster 2.
300,000
250,000
200,000
150,000
100,000
50,000
0
WE2/WE1 WE3/WE2 WE4/WE3
Fig. 2 GBO per WE (median)
Table 6 GBO per Weekend

Median
Cluster GBO_WE1 GBO_WE2 GBO_WE3 GBO_WE4
1 13.169 1.341 1.173 647
2 41.132 9.178 583 704
3 170.017 105.475 41.769 22.595
4 257.982 91.762 16.759 2.083
3 The GBO shows statistically significant differences among clusters in the four weekends:
Kruskal–Wallis test, χ 2 (3) = 179.4, 346.9, 455.1, 487.7, respectively in the four week-ends; always
p < .0001.
Table 7 Weekends and total GBO

Median TOT Median WE Median WE/TOT ratio
Cluster 1 47.509 17.777 0.536
Cluster 2 108.066 52.175 0.655
Cluster 3 571.708 341.294 0.636
Cluster 4 503.074 365.944 0.727
600000.0 0.800
0.700
500000.0
0.600
400000.0
0.500
300000.0 0.400
0.300
200000.0
0.200
100000.0
0.100
0.0 0.000
INC_TOT WE_TOT WE/TOT
Fig. 3 GBO comparisons
The second cluster is the only one that, despite very low absolute values, shows
an increasing trend in the GBO from the third to the fourth weekend.
We add information to our analysis by examining the ratio of the total GBO in the
four weekends to the total GBO4 (WE/TOT). The ratio shows statistically significant
differences among the clusters (Kruskal–Wallis test: χ 2 (3) = 147.1, p < .0001).
The results are summarized in Table 7 and in Fig. 3.
As we can see, movies in cluster 1 collected most of their GBO out of the first
four programming weekends: the cluster has the lowest median ratio. Clusters 2 and
3 show values on average: movies in the clusters collect GBO both during the first
four programming week-ends and out of this period. Movies in cluster 4 are the ones
that collected relatively big part of GBO in the first four weekends of programming
and a relatively smaller part of GBO out of that time: median ratio is high.
4 Last survey was conducted on March 1, 2020.

318 A. M. Bagnasco
3.2 Movies Nationality and Distribution Companies
The graph in Fig. 4 shows all the movies contained in the clusters.
We measure on the horizontal axis the total amount of GBO (tot) and on the
vertical axis the ratio of weekends GBO on total GBO (we/tot): the position of the
points are derived from the value of these two variables. Each point represents a
specific title and the colors of the points are different for each cluster. The cross
represents the average of each cluster relative to the considered variables.
As Fig. 4 shows there is much overlapping of points among the clusters;
nevertheless, our analysis shows that clusters are significantly differentiated with
regard to the items investigated.5
In order to analyze the nationality, we selected six countries, as the most relevant
for a represented number of titles: Italy, the USA, Germany, France, Spain, and
the UK. Other nationalities less represented in our data set for number of movies
released are collected together and indicated as Other. The proportion of movies
in the six countries shows statistically significant differences among the clusters
(χ 2 (24) = 55.24, p < .0003).
0.9
0.8
0.7
0.6
WE GBO /TOT GBO
cluster 1
0.5 cluster 2
cluster 3
0.4
0.3
0.2
0.1
0
1,000 10,000 100,000 1,000,000 10,000,000 100,000,000
TOT GBO (€)
Fig. 4 Movies for cluster
5 As we noted before in this chapter the items that, in our analysis, showed statistically significant
differences among clusters are: GBO trend over the four weekends, total GBO collected, the ratio
between weekend GBO and total GBO, movies nationality, and release company.
Clusters 1 and 2 are relatively highly characterized by the presence of Italian

movies. US movies are relatively highly represented in the fourth cluster, while they
are less concentrated in clusters 1 and 2, as French movies in cluster 4.
With the aim of analyzing the distribution company, we selected the following
as the most relevant for numbers of movies released: 01 Distribution, twentieth
Century Fox, Medusa, Nexo Digital,6 Universal, Walt Disney, and Warner Bros.
Other distribution companies less represented in our data set are collected under
Other.
The relative frequency of movies per distribution company shows statistically
significant differences among the clusters (χ 2 (21) = 109.18, p < .0001).
In clusters 1 and 2, the distribution companies Other and Nexo Digital are
relatively highly represented. Medusa and 01 Distribution are relatively highly
represented in cluster 4, where Other and Nexo Digital are less represented. In
cluster 3 is relatively highly present Walt Disney distribution, that is less present
in clusters 1 and 2 with Warner Bros.
4 Result and Conclusion
As Fig. 4 shows, there is much overlapping of points among the clusters. Neverthe-
less, our analysis shows that clusters are strongly differentiated among them.
As we saw at the beginning of this chapter, the number of movies released every
year is very high, but only few titles collect the most part of the box office gross.
One explanation for this fact is that most people are not able to recognize all the
products that the industry offers.
The conflict arises because many movies are launched without any marketing
supports and that are available in a very small number of screens. As literature
and industry reports confirm there is a positive relationship between a movie’s
production cost and its attractiveness to audiences. Launches tend to be either large
or small: they tend to be large only for those movies with an ex ante big budget
(Feds, 2016; Moul & Shugan, 2005; Waterman, 2005). These movies are the only
ones with the real opportunity to have a substantial market impact.
Each movie has its own level of opening appeal: this is partly artificially inflated
by the release strategies. The distributor chooses a release pattern: it includes the
number and location of theaters, the date to release its movies for exhibition, looking
for high demand periods, and seeking to avoid playing against movies that are strong
substitutes (De Vany, 2003).
There is a positive relationship between box office gross and screens number. A
movie with a high level of opening appeal is typically characterized by an ex ante
6 Italy-based,Nexo Digital is a leading player in the international sales of cinema events with a
focus on history and art documentaries.
320 A. M. Bagnasco
big budget, available on a high number of screens, strongly supported by marketing

campaigns, released by a major company.
Each movie has also its own level of quality: it depends on personal taste and it
is recognized after consumption.
Consumers are not able to distinguish among movies before watching them.
The level of opening appeal can correspond to the perceived quality or not.
Movies can be perceived in line, better or worse than expected with respect to the
level of opening appeal.
Among different hypothesis we can imagine, the following are the most interest-
ing for our purposes:
• A movie with a high level of opening appeal is perceived worse than expected;
• A movie with a low level of opening appeal is perceived better than expected.
Their relevance is given by the fact that those are the movies with audiences’
reception contrary to the expectations.
For the movies in the first group a wide release entails high opening expenses,
but it guarantees an immediate payoff. A wide release, despite its expense, is the
more profitable option in this case, because its larger opening can limit the negative
reception.
For the movies in the second group, it is reasonable that pleasantly moviegoers
will share their experience with others and positive word of mouth spreads. For these
better than expected movies the limited release and the positive word of mouth could
be profitable only over a relatively long-time horizon (Moul & Shugan, 2005).
These considerations are suitable for our results.
Summarizing the outcomes from our analysis, we can stress that the movies in
clusters 1 and 2 are those that collect relatively small box office gross; cluster 1
collects most of the box office gross out of the first four weekends of programming.
Clusters 3 and 4 are those characterized by relatively high box office gross;
cluster 4 is the one that collects more box office gross in the first four weekends
of programming.
We observe that there is an opposite characterization between clusters 2 and 4
about release companies. In cluster 2 there is a relatively high presence of Nexo
and Other distribution companies: they are those with a small number of movies
released every year (sometimes only one). The same distribution companies are
relatively small represented in cluster 4, where Medusa and 01 Distribution (the two
Italian mini major) are relatively highly represented.
Comparing clusters 2 and 4 and considering the positive correlation between
screens and box office gross, we can see that cluster 2 contains movies with a
relatively small box office gross and released on a small number of screens. We
suggest that cluster 2 could contain movies low budget, not supported by an effective
marketing campaign, but, nevertheless, able both to sustain theatrical exhibitions for
at least four weekends and to collect box office gross out of that time. A hypothesis
could be that the (small number of ) moviegoers who could watch the movies inside
this cluster made positive word of mouth. It could be useful to remember that this
is the only cluster with an increasing trend in the GBO from the third to the fourth
weekend. Our thesis is that in this cluster we can find some of those better than
expected movies cited above.
Cluster 4 contains movies distributed on a high number of screens and able
to collect high box office gross: nevertheless, we can observe that the box office
gross from one weekend to the other one decreases always faster (−64%, −82%,
−88%, see Fig. 2 and Table 6) and that the box office gross collected out of the first
four weekends of programming is relatively small compared to the one collected
over the first four weekends. We suggest that cluster 4 could contain some of the
movies strongly sustained by effective marketing campaign, but not performing in
the market as expected. This could be also confirmed by the relatively short life
of the movie out of the first four weekends of theatrical exhibitions. In this case, a
hypothesis could be that the (big number of ) moviegoers initially involved in the
movie experience did not make so positive word of mouth.
How could we conclude after all these considerations?
It is not realistic to rethink the distribution system of course, but in order to give
more chances to more movies we think of a system more flexible, at least enough
to accommodate situations when a movie’s quality is substantially different than its
expectations.
We think that it could occur only in the case of movies better than expected.
The ideal approach would be to expand the release to additional theaters as the
positive word of mouth increases demand. When viewers confirm to others that their
experience was worthwhile, it could be suitable to allow the number of exhibiting
theaters to expand. Such a strategy is relatively low cost but could help especially
young authors or small distribution companies with a good product and low budget.
We especially think of all movies produced using public money and often called
ghost movies because do not circulate on the screens. In terms of political economy,
we think that our system lacks attention and specific regulation on the release of
movies that are considered worthwhile of public funding.
Moreover, we think that the movie industry has a given level of spending
capacity: consequently, there is a trade-off between the number and variety of
different movies that can be produced and the first copy costs production of
those movies. So, with the same level of industry spending, we can either have a
large number and variety of relatively inexpensive movies or a small number and
variety of more expensive movies (Waterman, 2005). This market choice has wider
implications on the cultural value of the sector: it is through the quantity of produced
movies that could emerge plurality of genres, vitality, creativity, planning ability,
and new talents. In this direction, public cultural policies could play an important
role to ensure wider opportunities and more fair play among movies.
322 A. M. Bagnasco
5 Limitations and Future Research
Our findings are limited to only two of the four clusters analyzed. We have not yet
found a key to explain cluster 1 and 3. We also want to explore the movies excluded
from our sample. We will work on it. This is not the only limitation of the work.
Another limitation is due to the small variety of available data; unfortunately, this
aspect remains.
Moreover, our analysis needs to be completed with a strong qualitative survey:
we think it could be useful to analyze the titles in each cluster to understand if there
are more interesting aspects to examine.
We hope this second step could complete our analysis in the future.
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Patterns of Knowledge Creation
in European Regions: An Analysis
by the Phases of the EU-Enlargements
Thomas Baumert
Abstract This chapter studies the determinants of regional knowledge production

in Europe discriminating by the phases of the EU-enlargement (as a proxy for
the degree of economic development). For this purpose, we combine factorial
analysis with a regression model based on a knowledge production function. Our
results evidence that there are clearly differentiated patterns in the knowledge
production function of European regions according to the time of entrance of
their corresponding countries into the EU: the less developed regions are, the
more important the role of the Universities and of the Public administration in
their Innovation Systems is; in more developed regions, however, the leading role
is taken over by the Regional economic environment, the Sophistication of the
(technological) demand as well as by the availability of financing in the form
of Venture capital. We conclude that policy actions aimed to drive innovation
should carefully consider the relative stage of development of the specific regional
innovation system.
Keywords Innovation systems · Regions · European Union · EU enlargement ·

Knowledge creation
1 Introduction
Knowledge creation has become a major concern in innovation-driven economies.

Recognized as a—if not the— determinant factor of economic growth, it has
become a policy priority in many countries, supported by “innovation strategies”
T. Baumert ()
Universidad Antonio de Nebrija, Madrid, Spain
e-mail: tbaumert@nebrija.es
https://doi.org/10.1007/978-3-030-63970-9_23
326 T. Baumert
on several administrative levels (national, regional, and local), which have usually
been underpinned by the establishment of specific ministries, departments, and
offices to implement these policies (Mahroum & Al-Saleh, 2013, p. 320). In
the European Union —and, more generally, in advanced industrialized nations—
innovation policies on the regional level have acquired special relevance, with
regions becoming the main actors of economic development. In the case of the
EU, this fact has been underpinned by the implementation of policy measures such
as the EIT/SIA-strategies. Accordingly, several studies have tried to figure out the
exact degree to which different factors affect national and regional innovative perfor-
mance, although scholars interest in the topic seems to have decayed over the last
few years, focusing instead on a multiple-helix ecosystem approach (Peris-Ortiz,
Ferreira, Farinha, & Fernandes, 2016) and showing a more critical attitude towards
the traditional systemic view of innovation both from a theoretical (Gutiérrez-
Rojas & Baumert, 2018) and empirical point of view (Sternberg & Arndt, 2001).1
The regional-system approach has been frequently applied to the regions of the
European Union, as this setting represents an extremely interesting case study due
to the high heterogeneity of these entities regarding economic as well as innovative
performance (Marrocu, Paci, & Usai, 2011, p. 3), despite the fact that works like the
one by Carrincazeaux and Gaschet (2015) question the regional dimension of these
systems, as they conclude that national institutional settings remain of fundamental
importance in shaping a number of regional configurations, despite the persistently
high level of diversity between them, notably among knowledge-intensive regions.
Although most of these studies treat the regions of the EU as a set of equal,
homogenous units of analysis (Buesa, Heijs, & Baumert, 2010, among others);
works such as the one by López-Fernández, Serrano-Bedía, and García-Piqueres
(2012) have centered their attention on regional “subsets” as, e.g., peripheral
regions, while Gutiérrez-Rojas, Heijs, and Baumert (2018) have studied the pres-
ence of (asymmetric) spillovers from national towards regional innovation systems
and authors such as Edsand (2019) have focused on the systems of developing
countries.
Yet—to our best knowledge—so far none has studied whether there are different
patterns across European regions depending on the time of their EU-entrance.
This classification, although unusual at first sight, results actually very useful,
as it might reflect a better mean than other criteria not only a single aspect of
development (such as the per capita income, central-periphery location, relative
R&D expenditure, etc.), but cluster together regions with similar geographical,
historical, cultural,2 economical, sociopolitical and, most important, institutional3
1 The authors conclude that firm-specific factors are much more important than regional or national
(i.e., systemic) ones.

2 This procedure allows to a certain extend to overcome the problem of cultural factors which,
although usually pointed out as significant in theory, are seldom—one exception being the work
by Varsakelis, 2001) included in empirical models. See for this Krammer (2009, p. 846).
3 For a succinct overview of the role of institutions on economic development, see Baumert (2020).
Patterns of Knowledge Creation in European Regions: An Analysis. . . 327
background.4 Hence, for example, the enlargement of 1981/1986 groups together

three of the so-called PIGS—namely Portugal, Greece, and Spain, which not only
share a similar geographic latitude, but also had in common having left behind
autocratic political systems—the 1995 enlargement groups together countries with
relatively small populations (and, mainly in the first two low populations densities),
namely Sweden, Finland, and Austria, while the 2004 enlargement includes the
more developed countries of the former Soviet sphere of influence and those of
2007 to the more peripheral of the East-European countries (Map 1).
Studying the likely differences in the knowledge production functions of these
groups or “subsystems” of regions—which, despite strict economic heterogene-
ity are homogenous in terms of their socioeconomic, historical, political, and
institutional background—might reveal helpful insights regarding the determinants
of innovation for different stages of development thus overcoming the usual
shortcomings even of working with relatively brief time-series, and hence coping
with the exigency made by Hu and Mathews (2005, p. 1323) according to which
Map 1 European regions by year of their EU-entrance (at the moment of the analysis)
4 Exception made of the “new” German Länder which were automatically incorporated to the EU
as a result of the Reunification.
328 T. Baumert
“innovation in the case of latecomer countries has to be understood in a way that

is rather different from innovation in the case of the leaders”—the same applies to
regions.
2 Literature Review
The literature regarding the determinants of innovation has grown significantly over
the last decades, embedded in the development of the System of Innovation frame-
work. Inspired by Friedrich List’s “National System of Political Economy” Lundvall
(1992) and Freeman (1987) highlighted the importance of adopting a systemic view
which takes into consideration the interactions between suppliers and customers—
and, more generally speaking the different agents of the system—in their role in
stimulating and reinforcing innovation. This System of Innovation framework was
subsequently expanded conceptually and empirically by a large number of scholars
and institutions, most notably by Lundvall (1992) and the OECD (1997). Thus, the
Innovation System approach has changed the analytical perspective on innovation
from the traditional linear model (e.g., that of a “technology push” and “market pull”
or “basic research” and “applied research”) to a more holistic, systemic view of the
interaction between all actors and the environment in which they are interacting (cf.
Mahroum & Al-Saleh, 2013, p. 322).
Despite the growing number of empiric studies about the determinants of
innovation or new knowledge, most of them can be classified according to a double
grid, depending on whether they work on a national or regional basis, and whether
they use “real” variables or “hypothetical” ones resulting, for example, from a
factorial analysis. Figure 1 gives an overview of this classification for those works
which study a set of more than one country (exception made of those of huge sizes
such as the US, China, and the Russian Federation).
This multiplicity of studies also allows talking about a certain consensus
regarding the variables which can be considered fundamental in the creation of
new knowledge: the size of the region/nation, the sophistication of the demand, the
R&D efforts due to enterprises, the role of universities and public research centers
as agents of the innovation systems, the presence of venture capital, etc. Broadly
speaking, the “standard” classification with this kind of study which itself relied
heavily on the previous contributions, namely of Romer’s (1986, 1990) Endogenous
Growth Theory, Porter’s (1990) Cluster based theory of National Competitive
Advantage and the already mentioned literature referred to the Innovation System
approach, as well as the triple, quadruple, and quintuple helix. Accordingly, three
key dimensions of determinants have been defined (see for this López-Fernández et
al., 2012, pp. 2–4; Buesa et al., 2010, pp. 724–726):
Level of geographical analysis

National Regional
Griliches (1990)1 Jaffe (1989)1

Gans and Stern (2003)2 Acs et al. (1992)1
Kind of independent variables used
Riddel and Schwer (2003)1 Feldman (1994)1

Faber and Hesen (2004)2 Anselin et al. (1997)1
Furman and Hayes (2004)3 Acs et al. (2002)1
Hu and Mathews (2005),6 Fritsch (2002)2 [selected
(2008)5 regions]
Krammer (2009)4 Greuz (2003)2
“Real” variables Bartels et al (2012)3 Botazzi and Perri (2003)2
Ramzi and Salah (2018)7 Moreno-Serrano et al. (2005)2
Li (2009)5
Karkalakos (2010)2
Marrocu et al (2011)2
López-Fernández et al.
(2012)2 [peripheral regions]
Zemtsov et al. (2016)8
Perret (2018)9
Perret (2019)8
“Hypothetical”
variables (factors) Buesa et al (2010)2
Fig. 1 A classification of the main studies regarding the determinants of innovation. (Source: Own
elaboration). 1 Applied to the United States of America; 2 Applied to the European Union; 3 Applied
to “follower”/less developed countries; 4 Applied to Eastern Europe; 5 Applied to China; 6 Applied
to East Asia; 7 Applied to euro-Mediterranean countries; 8 Applied to the Russian Federation;
9 Applied to the Russian Federation and the USA
• Common infrastructure of innovation: this first dimension is made up of three

factors related to the investment that supports innovative activities: the aggregate
level of technological sophistication of an economy; the availability of qualified
scientific personnel dedicated to R&D; and a third group of variables related to
domestic investment and innovation policies decision.
• Specific environment for innovation clusters: this second dimension includes
variables such as the involvement of the private sector in financing innovative
activities or the technological specialization of the economy.
• The quality of the linkages: this third dimension includes economic indicators
such as the R&D effort—in terms of expenditure and of personnel employed—
of the universities and the availability of financial support in the form of venture
capital.
Based on this growing literature, a range of determinants of the production of
new ideas or knowledge can now be defined, which have alternatively been stressed
by different authors and “schools of thought.” However, in the present study, we
opt for a more general approach, to conjunct different methods and “schools”
towards a unified model. This implies the simultaneous use of a huge number of
variables so that no relevant one—even if it is of secondary importance—is left
out of the model. However, as this uses to carry along a series of problems in the
330 T. Baumert
specification of the regression frontier, the present work follows the example of
Buesa et al. (Buesa et al., 2010; Buesa, Heijs, Martinez, & Baumert, 2005; Buesa,
Heijs, Martínez, & Baumert, 2007) applying a factorial analysis in order to reduce
the total number of variables while minimizing the loss of variance. This procedure
not only allows an easier interpretation of the model’s results but also offers the
advantage of minimizing the possible correlation between variables thus facilitating
the regression process, as will be explained more in detail in Sect. 4.
3 Theoretical Framework
The results presented in this chapter are based on a two-step model: first, we apply
a factorial analysis to reduce the number of variables contained in our database or
a smaller number of “hypothetical” variables. In a second step, we use these factors
as independent variables in a knowledge production function in order to estimate
which factors incise in a statistically significant way—and to which degree—on
the innovative output of the European regions grouped by their year of entrance
into the UE. In doing so, we use the IAIF-EU(RIS) database which basically
compiles information from EUROSTAT-REGIO database (with the missing values
conveniently estimated) adding two variables—the ICT penetration5 and the Index
of Economic Freedom6 from other sources. The database has been constructed for
the period 1995–2008—we avoid later data to avoid distortion due to the crisis
and possible dilution of the object of our study due to the effects of convergence
policies—and 193 regions7 —mostly one of the NUTS2 level—8 belonging to the
27 countries that at the time composed the European Union.9 Consequently, the final
database consists of a matrix of 29 variables by 2702 cases.
5 ITU (2007, 2010).

6 As available on http://www.heritage.org/index/.
7 According to the following geographical classification (in brackets the number of
regions):NUTS1: Belgium (3), Germany (16), Ireland (1), the United Kingdom (12), Slovenia
(1), Bulgaria (2), and Romania (4); NUTS2: Denmark (1), Greece (13), Spain (17), France (22),
Italy (20), the Netherlands (12), Austria (9), Portugal (5), Finland (6), Sweden (8), Czech Republic
(8), Estonia (1), Cyprus (1), Latonia (1), Lithuania (1), Hungary (7), Malta (1), Poland (16), and
Slovakia (4).
8 An attempt has been made to select, whenever the level of statistical disaggregation has allowed
to do so, the NUTS level which corresponds to an administrative entity with real capability in the
design and implementation of innovation policies.
9 We have intentionally left out the case of Croatia, who entered the EU in 2013, which allows only
for a NUTS1 analysis (Croatian NUTS2 being a non administrative level, cf, the previous note) as,
having to be modeled separately, would now allow for enough degrees of freedom. As a reminder:
the UK was then still a full member of the EU.
3.1 Factorial Analysis
As already stated, a factorial analysis is carried out in order to reduce the number of
data one is working with, while maintaining the highest level of their explanatory
and predictive capacity (variance) thus generating six factors or “unobservable
variables”, which are linear combinations of the original variables contained within
them. These factors reflect better the reality of an innovation system than each of the
individual variables could do, as they not only group together all related variables
but also reflect the interaction between factors, as the model correlates each variable
to all factors, not only to the one in which it is included.
The validation or quality of the factor analysis is based on the statistical tests
and the inherent logic of the found factors. The different tests to confirm the
quality of our factor analysis are positive.10 The communalities (correlation of each
variable with regard to the set of the other variables making up this factor) of the
variables are relatively high, all of them—exception made of three cases—over
0.800, which guarantees the reliability of the findings and indicates the high degree
of preservation of their variance (the matrix of rotated components is presented in
Table 1). Moreover, the six factors retain 86.79% of the original variance, that is,
there is scarcely a 13% loss of information originally contained in the variables.
We have carried out a VARIMAX-type rotation since the factorial pattern obtained
by this procedure tends to be more robust than the one obtained from alternative
methods and this option assures a maximum orthogonality between factors which is
important in the next step of our analysis.
As can be seen in Table 3, the six resulting factors can be easily explained from
a theoretical point of view. As usually occurs when clustering variables by means
of a factorial analysis, the first factor reflects the “size”, while the others refer to
the “form” of the innovation system, perfectly fitting the above explained three
dimensions of innovation determinants. Accordingly, the first one—which accounts
for 33.6% of the total variable—can be considered the Regional Environment of
Innovation, including variables referred to the region’s absolute economic and
population size. The second, fourth, and fifth ones—which all account for a very
similar retained variance of between 12.4 and 11.0%—refer to the three agents of
the regional innovation system (Universities, Innovative Firms, and Public Admin-
istration), while the third—which explains a retained variance of 11.2%—clearly
reflects the (Technological) Sophistication of the Demand, including variables such
as the GDP in per capita terms, the degree of penetration of the ICT, and the Index
of Economic Freedom. Finally, the fifth factor—which accounts for the 7.5% of
the retained variance—represents the importance of Venture Capital in its different
forms. This specification meets the three requirements stated by Buesa et al. (2010,
p. 727) for validating the outcome of a factorial analysis: (1) The variables included
in each factor belong to the same component or subsystem of the overall regional
10 The Kaiser-Meyer-Olkin test gives a value of 0.854 and the null hypothesis of the Barlett
sphericity test can be rejected at the 99% level.
332 T. Baumert
Table 1 Matrix of rotated components

Component
1 2 3 4 5 6
Annual average population .959
Human Resources in C&T—Education (thousand of people.) .937
Human Resources in C&T—Occupation (thousand of people) .972
Human Resources in C&T—Core (thousand of people) .947
GDP (millions of AC of 1995) .943
Gross Fixed Capital Formation (millions of A
C of 1995) .913
Wages (millions of AC of 1995) .937
Net Added Value (millions of AC of 1995) .944
Number of people employed (thousand) .964
R&D expenditure of the universities (% of GDP) .711
University’s R&D staff (HC) % of employment .936
University’s R&D staff (FTE) % of employment .916
3rd cycle students (% population) .805
GDP per worker (A C) .855
GDP per capita (AC) .862
ICT penetration .622
Economic freedom index .530 .522
Firm’s R&D expenditure (% of GDP) .891
Firm’s R&D staff (HC) % of employment .864
Firm’s R&D staff (FTE.) % of employment .870
Public Administration’s R&D expenditure (% of GDP) .901
Public Administration’s R&D staff (HC) % of employment .936
Public Administration’s R&D staff (FTE) % of employment .952
Seed and start-up investment (% GDP) .763
Development start-up investment (% GDP) .867
Method of extraction: Main components analysis. Method of rotation: Varimax Normalization
with Kaiser. Rotation has converged in six iterations
innovation system. (2) The variables belonging to a certain subsystem are located in
only one factor, and (3) If each factor or can be labeled with a “name” that without
any reservation neatly expresses its whole content. These results thus coincide
basically with the determinants pointed out by the theory—specifically with the
restricted concept of the innovation system (Asheim & Gertler, 2005, p. 300)—as
well as with those of Buesa et al. (2005, 2007, 2010).
Thus, we consider that the model with six factors is supported by two facts: In the
first place, it is the result of objective processing (the main components analysis).
To this is added that the model lends itself to easy interpretation (since the variables
are not saturated in more than one factor), the factors obtained match the theoretical
postulates, and the model is extremely robust, in addition to maintaining a high
percentage of the original variance.
3.2 Regression
In the second step of our analysis we use these “synthetical” variables—that is,
the factorial punctuations previously obtained—to estimate a knowledge production
function, grouping the regions by the year of their entrance to the European Union,
according to the following specification:
Kit = β0 + β1 ENVit + β2 UNIit + β3 DEMit + β4 FIRit + β5 ADMit + β6 CAPit

+ εit + μi + νt
(1)
where:
Kit = New economically valuable knowledge (by means of the number of patents)
and Kit obs > 0
ENVit = Regional economic and productive environment
UNIit = University
DEMit = (Technological) Sophistication of the demand
FIRit = Innovatory Firms
ADMit = Public Administration
CAPit = Venture capital
εit = Overall error term
μi = Individual-specific, time-invariant error component
ν t = Time-specific, individual-invariant error component
Several points have to be cleared regarding this equation. First of all, the
system’s output—that is, the creation of new knowledge—is measured using patents
and patents per capita as means of a proxy.11 So far, there is no consensus in
measuring firms’ inventive and innovative efforts. However, there seems to be a
broad acceptance in considering Expenditures on research and development and the
number of Personnel engaged in formal R&D activities as inputs of any innovation
system; while Patents and estimates of Sales associated with new products are
recognized as a count of the system’s output (Bhattacharya & Bloch, 2004, p.
156). In this context, patents are obviously not the perfect indicator of innovative
performance; however, for an analysis that dates back in time up to 1995, it is
undoubtedly one of the best indicators available.12
Second, estimating the regression with factors means a series of important
advantages: When the number of explanatory variables is reduced—six factors
instead of 25 original variables—the risk of saturation of the model through
the inclusion of too high a number of variables and the possible problems of
colinearity decrease (Hair, Anderson, Tatham, & Black, 1999, p. 152). This problem
11 The patents statistics offered by EUROSTAT have the advantage of overcoming the “headquarter-
effect” as patents are registered in the inventor’s region of residence.

12 For an in-depth discussion about the advantages and limitations of patens as measure of
innovation, see Buesa et al. (2010, pp. 723–724).
334 T. Baumert
is minimalized in our model because the regression is calculated with factorial

points estimated by the Varimax method in which the orthogonality among the
factors is maximized (Hartung & Elpelt, 1999, p. 515). Consequently, the colinearity
between factors minimized. Moreover, the regression models calculated with factors
are statistically more robust and solid in their interpretation because (1) the model is
less sensitive to “leaps” or errors (due to data recording) in a particular variable as
they are “softened” by the rest of the variables included in the same factor. (2) The
regression with factors is more robust since it can include alternative—mostly highly
correlated—variables simultaneously. Since they work with variables, the models
usually show notable changes on the basis of the variable used, even though these are
very similar (for example, GDP and VAB or Human Resources measured in absolute
number of persons or in full-time equivalents. (3) They enable the information of
the set of variables to be reduced to the essential. The factors, being clear, may turn
out even clearer in their interpretation than certain variables. And (4) the factors not
only take into account the correlation of each variable with the factor with which it
shows the highest degree of saturation but also with all the other ones, so that, even
if it is not explicitly included in the model, the latter takes into consideration the
interaction between variables/factors.
Finally, the estimation procedure chosen for the regressions is a Tobit panel data
model, due to the fact that the output variable is left-side censored at zero, and to
account for possible effects between regions over time,13 according to the model
originally validated by Calzolari and Magazzini (2008).
4 Empirical Results
The estimations obtained when running the regressions according to the above-
specified model are presented in Tables 2 and 3, the former when working with
the number of patents per habitant as output, the latter for the number of high-
tech patents per habitant. We opt to work with the output in relative terms, as this
allows overcoming the “size effect.” It has to be kept in mind, that the coefficients
presented are BETA coefficients, that is, they show the elasticity in terms of standard
deviations.14 This means that the different BETAs within one regression can be
compared as a measure of relative importance between factors, but they cannot be
used for direct comparison of the coefficients between models.
13 Itshould be kept in mind, that the coefficients of a Tobit regression estimation have to be
interpreted as the combination of (1) the change in Kit of those above the limit, weighted by the
probability above the limit and (2) the change in the probability of being above the limit, weighted
by the expected value of Kit if above.
14 The relation between B coefficients and BETA coefficients is BETA = B × Sxi .
i i Sy
Table 2 Tobit panel estimation results by year of EU-entrance. Output: patents per habitant
EU-9 1981/1986 enlargement 1995 enlargement EU-15 2004 enlargement 2007 enlargement
Regional environment 34.97(0.000) 7.75(0.000) 4.27(0.920) 28.46(0.000) 18.09(0.000) −0.66(0.221)
University −6.70(0.007) 3.07(0.000) 0.21(0.976) −0.47(0.799) 2.39(0.000) 0.59(0.010)
Demand 35.78(0.000) 8.79(0.000) 27.59(0.000) 28.94(0.000) 11.25(0.000) 0.42(0.437)
Innovatory firms 35.59(0.000) 18.99(0.000) 48.82(0.000) 35.90(0.000) 11.17(0.000) 0.088(0.827)
Public administration 7.29(0.019) 2.60(0.057) 38.88(0.030) 4.93(0.076) 2.75(0.000) 0.83(0.000)
Venture capital 11.48(0.000) 2.96(0.000) −0.96(0.769) 7.03(0,000) 2.74(0.000) 0.06(0.646)
Constant −399.01(0.000) −150.88(0.000) −344.89(0.064) −336.40(0.000) −166.85(0.000) −2.70(0.472)
Sigma u 70.34 8.22 69.23 69.40 5.57 0.00
Sigma i 26.35 5.20 39.96 26.69 3.63 0.53
Rho 0.87 0.71 0.75 0.87 0.70 0.00
Wald test 340.22(0.000) 566.61(0.000) 101.99(0.000) 478.09(0.000) 370.10(0.000) 326.39(0.000)
Log-likelihood −6077.88 −1556.60 −1604.05 −9946.90 −1628.14 −65.73
Patterns of Knowledge Creation in European Regions: An Analysis. . .
Chibar2 (01) 1966.85(0.000) 411.11(0.000) 288.76(0.000) 2933.53(0.000) 422.76(0.000) 0.00(1.000)

In brackets the p-value. In italics the non-significant coefficients to 99%
Source: Own elaboration
335
336
Table 3 Tobit panel estimation results by year of EU-entrance. Output: hi-tech patents per capita
EU-9 1981/1986 enlargement 1995 enlargement EU-15 2004 enlargement 2007 enlargement
Regional environment 7.80(0.000) −2.07(0.000) −1.65(0.920) 6.14(0.000) 0.66(0.278) −0.26(0.402)
University −3.55(0.005) 0.47(0.000) 7.34(0.006) 0.53(0.554) 0.75(0.000) 0.50(0.000)
Demand 9.93(0.000) 0.95(0.000) 4.25(0.099) 6.93(0.000) 1.34(0.000) 0.07(0.776)
Innovatory firms 10.36(0.000) 1.77(0.000) 17.31(0.000) 11.42(0.000) 1.16(0.000) 0.10(0.647)
Public administration 1.25(0.391) 0.66(0.008) 32.47(0.000) 1.98(0.115) 0.30(0.009) 0.14(0.000)
Venture capital 5.04(0.000) 0.56(0.000) 4.27(0.004) 4.01(0.000) 0.46(0.000) 0.01(0.909)
Constant −114.00(0.000) −22.99(0.000) −232.70(0.001) −110.31(0.000) −15.70(0.000) −1.31(0.521)
Sigma u 24.44 0.78 22.15 23.32 1.00 0.06
Sigma i 13.95 1.22 19.08 13.49 1.13 0.25
Rho 0.75 0.28 0.57 0.75 0.44 0.05
Wald test 134.09(0.000) 278.13(0.000) 110.23(0.000) 223.69(0.000) 123.51(0.000) 45.69(0.000)
Log-likelihood −5244.28 −822.38 −1369.29 −8493.22 −937.90 −5.55
Chibar2 (01) 1324.57(0.000) 75.77(0.000) 184.35(0.000) 2019.82(0.000) 205.12(0.000) 1.01(0.157)
In brackets the p-value. In italics the non-significant coefficients to 95%.
T. Baumert
Focusing on Table 2 (patents per capita), the results of the first column—which
refers to the early members of the EU—15 show that all factors are statistically
significant, although with important differences in their relative weight. Thus,
the determinants Sophistication of the demand, Innovative firms, and Regional
environment show nearly identical BETA coefficients (35.78, 35.59, and 34.97,
respectively). These are followed, with less than a third of relative importance, by
the factor Venture capital (11.48), while the factor University presents a negative
impact (−6.70). This would point towards the fact that in technologically more
developed regions—those which first joined the EU—the role of innovating firms is
so important, that diverting expenditure towards R&D done by the university might
have an out-crowding effect on the system in terms of patenting. However, we will
discuss this question more in detail later on.
In the case of the countries of the 1981/1986 enlargement,16 the first factor
of importance is Innovative firms (18.99), followed by the Sophistication of the
demand (8.79), the Regional environment (7.75) and, with less relative importance,
University (3.07) and Venture capital (2.96). In the case of the regions belonging
to the countries of the 1995 enlargement,17 only two factors result statistically
significant: Innovative firms (48.82) and the Sophistication of the demand (27.59).
However, it might be assumed that, because of the large timespan passed since the
incorporation of these countries to the EU, and due to the fact that during these years
the active convergence policies of the own Union might have contributed to reduce
the inherent differences between them, we consider it worth to present the results for
the regions of the so-called EU-15, grouping them together in one regression: the
model shows that in this case neither the role of the University nor that of the Public
Administration are significant. Instead, the relevant factors, in decreasing order of
importance, are Innovating firms (35.90), the Sophistication of demand (28.94), and
the Regional environment (28.46).
The next two groups to be analyzed refer to the regions of the countries of
Eastern Europe. Starting with those who joined the EU in 2004,18 and which we
could consider to present—in European terms—an intermediate level of industrial
development, it is evidenced that all six factors show a significant positive impact on
the number of patents per capita, in which the Regional environment—unlikely what
occurred in the previous cases—shows the highest coefficient (18.09), followed by
the Sophistication of the demand and the Innovatory firms with nearly identical
BETAs (11.25 and 11.17, respectively) and the Public Administration (2.75),
Venture Capital (2.74), and the University (2.39), far behind the other factors.
15 The regions of Belgium, the Netherlands, Luxembourg, France, Germany, the United Kingdom,
Ireland, Italy, and Denmark.
16 The regions of Greece, Spain, and Portugal.
17 The regions of Austria, Finland, and Sweden.
18 The regions of Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland,
Slovakia, and Slovenia.

338 T. Baumert
Finally, the regions corresponding to the 2007 enlargement19 —which by Euro-

pean means represent the less developed areas of the EU—present only two
significant factors, curiously those which result less relevant in all other models: the
Public Administration (0.89) and the University (0.59). This would point towards the
fact that it is precisely in the less developed stages of an economy, in which business
initiative and firms are less developed, where the innovation efforts are fulfilled by
the other agents of the system (which, when the economy reaches a higher level
of development and the firms acquire the leading part, change to accomplish a
supportive role towards these). This would confirm the hypothesis that although
firms are the primary locus of innovation systems in developed regions, this might
not be so in transition economies (Li, 2009, p. 339). However, it should also be
noted that the 2007 enlargement, due to its low number of cases, is the only one in
which the Chibar2(01) test indicates that there would be no difference in the results
if handling the regions as a pool instead of a panel, due to the critical number of
cases.
Table 3 presents the results obtained for the case of the high-tech patents per
capita. Essentially, these results do not defer from the ones previously obtained.
Working with the regions of the founding members of the EU, the most important
factor is the one referred to the Innovatory firms (10.36), followed by the Sophisti-
cation of the demand (9.93), the Regional environment (7.80), and Venture capital
(5.04) and—again with a negative impact—the University (−3.55); this would,
again, support our above-stated hypothesis.
When working with the high-tech patents, slightly different results are obtained
in the case of the 1981/1986 enlargement. Again, the most important factors are
Innovatory firms (1.77) followed by the Sophistication of the demand (0.95), but
now also the Public Administration is significant (0.66), as is the Venture capital
(0.56) and the University. Unlikely what happens when working with the patents
per capita, the factor Regional environment shows a negative impact (−2.07).20
Surprisingly, the regions corresponding to the 1995 enlargement present the
Public Administration as the most important factor (32.47), the Innovatory firms
holding the second rank (17.31), and the Universities the third (7.34)—it was not
significant when working with all patents—and the Venture capital (4.27). This
would indicate, that, in the creation of new high-tech knowledge, the R&D done
by Universities and the Public Administration plays a more significant role.
Once more, we also repeat the regression grouping the three previous cases
together in order to obtain the estimations for the EU-15; however, obtaining very
similar results than when working with the total patents per capita: Innovatory
firms (11.42), Sophistication of the demand (6.93), Regional environment (6.14),
and Venture capital (4.01).
Despite what happened in the equivalent in Table 3, the regression of the 2004
enlargement shows no significance in the factor Regional environment. The rest of
19 The regions of Bulgaria and Romania.

20 We have so far, found no convincing explanation to this fact.
the determinants rank the Sophistication of the demand (1.34) in the first place,
Innovatory firms (1.16) in the second, the University (0.75) in the third, Venture
capital (0.46) in the fourth, and Public Administration (0.30) in the fifth.
Finally, the regions of the 2007 enlargement again show only two significant
variables, namely the University (0.50) and the Public Administration (0.14)—thus,
supporting our above-stated hypothesis—although again the previously mentioned
statistical limitation applies.
As has been already stated, we opted to work with the output in relative terms
in order to avoid any “size effect.” However, the results obtained of the regressions
using the number of patents and of high-tech patents in absolute terms (presented
in the Appendix) do essentially coincide with the previous ones, except for the fact
that the “size”-factor Regional environment shifts—as expected—to the first place
of importance thus replacing the Innovative firms.
However, the estimated ρ shows that substantial correlation exists across the
error terms in our data. Accordingly, the coefficients have been reestimated using
a standard panel-data fixed-effects specification. Although this obviously results
in some changes in the relative weight of the coefficients within each model, no
significant differences regarding the significance/insignificance of the estimated
parameters, nor in the direction of their effects become apparent, except in the
case of the regions of the 2007 enlargement in which all variables tend to lose
significance. Thus, and despite its shortcomings, we still consider the Tobit random-
effects alternative the preferred model.
5 Discussion and Conclusion
The result of our analysis evidence that there are clearly differentiated patterns in
the knowledge production function of European regions according to the time of the
entrance of their corresponding countries into the EU. If we consider this variable
as a proxy for the socioeconomic and institutional development of the regions, we
can—roughly speaking—distinguish three main groups of regions: those of the
so-called EU-15 (the equivalent to the most developed ones), those of the 2004
enlargement (which present an intermediate level of development), and those of the
latest (2007) enlargement, which represent the most peripheral regions.
In the more developed regions—namely those who entered the European Union
up to 1995, the so-called EU-15—the most important factor is the one referred to
Innovating firms, usually identified as the main driver of innovation in developed
340 T. Baumert
countries (Krammer, 2009, p. 858). They are followed by the Regional environment
of innovation as well as the Sophistication of the demand and the availability of
Venture capital, while no significant impact is detected in the case of the Public
Administration, and one of the Universities even presents a negative coefficient.
This would point towards the hypothesis that, in technologically more developed
regions where the role of innovating firms is of much relevance, diverting R&D
expenditure towards universities might cause an out-crowding effect on the system
in terms of patenting. Of course, we should bear in mind that this result is skewed by
the fact that universities present a much lower propensity to patenting than private
firms and that universities and the government R&D carry out their role as agents
of the regional innovation system in a supportive—that is indirect—manner towards
firms.
At the same time, the regions ascribed to the intermediate level of socioeconomic
and institutional development, present a knowledge production function in which all
elements of the system are relevant, although, again, the factors Innovating firms and
Sophistication of the demand point out, the differences in the relative importance of
determinants seem to be less than in the previous case. Krammer (2009) analyzing
the determinants of innovation in transitional Eastern Europe comes precisely to
the conclusion that overall in these countries “patenting rates depend significantly
on private R&D commitment similar to OECD studies, but also on governmental
efforts, like in the case of Asian latecomers” (Krammer, 2009, p. 858). In these
regions also the University plays a significant (although limited) impact in the
innovation process, a fact also indicated by López-Fernández, Serrano-Bedía, and
García-Piqueres (2012, p. 8) when referring to the European peripheral regions.
Finally, the regions corresponding to the EU-enlargement of 2007, present only
two significant variables, namely the University and the Public Administration,
precisely those, which in higher developed regions have proven to lack any positive
direct impact. This result coincides with the ones obtained by Li (2009) who, study-
ing China as a case of economic transition concludes that, in this kind of economies,
“universities and research institutes play a favorable role in invention patenting
[ . . . ] dominating the creation of the most technological intensive innovations” (Li,
2009, p. 355). A similar conclusion is reached by Hu and Mathews (2005, p. 1329,
1339) after studying the innovation capacity of East Asian economies.
Accordingly, and as we have represented in Fig. 2, we could conclude that the
role of the Universities and the Public Administration is of crucial character in
less developed regions, in which the regional infrastructure has still not developed
and the entrepreneurial system is not yet fully consolidated. As the next stage of
development is reached, firms start to take over the leading role from the previous,
accompanied by the Regional economic environment in which they work and
supported by an increasing Sophistication of the (technological) demand as well
as by the availability of financing in the form of Venture capital. However, as the
higher stage of development is reached,—including those regional economies which
could be classified as “innovation-driven”—the leading role is plainly assumed by
high
Innovatory firms;
Sophistication of the
Relative importance
Demand; Regional
environment;
mediium
Venture Capital
Universities; Public
Administration
low
EU-15 2004 2007

enlargement enlargement
Fig. 2 Relative importance of the determinant factors of innovation by the time of their EU-
entrance. (Source: Own elaboration)
the Innovating firms, the Regional economic environment in which they act, the
(Technological) Sophistication of the demand of their immediate market, and the
disposal of Venture capital to finance their entrepreneurial initiatives. The R&D
performed by the Universities and the Public Administration, which perform a
merely supportive role, with effects that although important, have become indirect
ones. The results of our study can be considered robust, as no significant differences
have shown up when working either with the total number of patents or high-tech
patents, and either in absolute or relative terms.
Hence, we might conclude that policy actions aimed to drive innovation should
carefully consider the relative stage of development of the specific regional inno-
vation system.21 At the early phases of development, policies aimed to propel
R&D done by Universities and the Public Administration, at the same time than
enhancing the progress of Firms and the Regional economic environment might
prove effective. However, these same policies might lack any outcome or may
even cause a negative one when applied to more advanced regions. Thus, “fit-for-
all” policies will fail in most cases to reach their aims, while only “tailor-made”
strategies which judiciously acknowledge the precise stage of development of the
regional innovation system, might conveniently improve its outcome (Tödtling &
Trippl, 2005), as innovation activities differ strongly between regions regarding their
stage of structural and institutional development.
21 Of course, we cannot rule out the possibility that specific regions present such an atypical
behavior in terms of innovative production, that they should be considered as outliers regarding
their adscription group, better fitting another one that the one corresponding to the year of its
EU-entrance. However, this does only reinforce our conclusion about the necessity of carefully
studying the specific stage of development of a region before applying any innovation-policy
measures.
342
Appendix: Tobit Panel Estimation Results by Year of EU-Entrance. Output: Patents and High-Tech Patents
Output: patents Output: high-tech patents

1981/1986 1995 2004 2007 1981/19861995 2004 2007
EU-9 enlarg. enlarg. EU-15 enlarg. enlarg. EU-9 enlarg. enlarg. EU-15 enlarg. enlarg.
Regional environment 583.24 113.50 343.20 473.94 63.78 0.82 107.67 22.80 87.80 92.53 6.86 −0.36
(0.000) (0.000) (0.000) (0.000) (0.000) (0.736) (0.000) (0.000) (0.004) (0.000) (0.000) (0.978)
University −38.84 6.98 19.18 −17.74 2.90 4.34 −22.00 0.31 10.74 −9.10 0.85 2.90
(0.004) (0.003) (0.032) (0.035) (0.001) (0.000) (0.000) (0.592) (0.023) (0.003) (0.001) (0.000)
Demand 98.73 6.01 42.18 55.51 19.08 3.74 33.88 1.16 10.02 17.13 2.95 0.73
(0.000) (0.076) (0.000) (0.000) (0.000) (0.125) (0.000) (0.198) (0.026) (0.000) (0.000) (0.536)
Innovatory firms 181.86 34.99 91.22 115.69 19.47 3.97 47.35 4.41 33.18 33.64 2.68 1.27
(0.000) (0.000) (0.000) (0.000) (0.000) (0.030) (0.000) (0.000) (0.000) (0.000) (0.000) (0.186)
Public administration 54.15 12.81 91.58 24.53 5.66 3.32 5.08 0.36 59.99 2.12 1.02 0.57
(0.001) (0.005) (0.000) (0.049) (0.000) (0.000) (0.373) (0.753) (0.000) (0.625) (0.000) (0.001)
Venture capital 44.50 7.91 13.06 26.48 4.67 0.21 21.25 1.90 9.52 14.21 0.93 −0.04
(0.000) (0.000) (0.003) (0.000) (0.000) (0.734) (0.000) (0.000) (0.000) (0.000) (0.000) (0.867)
Constant −3473.69 −652.00 −2074.56 −2420.90 −407.02 −49.40 −748.87 −111.78 −765.31 −555.48 −53.57 −16.21
(0.000) (0.000) (0.000) (0.000) (0.000) (0.004) (0.000) (0.000) (0.000) (0.000) (0.000) (0.063)
Sigma u 31.68 43.00 88.82 395.24 14.63 0.00 93.03 7.44 39.99 82.43 2.62 0.22
Sigma i 2.93 15.88 50.51 116.20 6.31 2.39 55.03 4.28 32.76 45.90 2.11 1.12
Rho 0.89 0.87 0.75 0.92 0.85 0.00 0.74 0.75 0.59 0.76 0.60 0.04
Wald test 679.08 608.31 173.03 1753.55 376.19 245.70 384.17 263.68 111.20 471.55 108.14 57.24
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Log-likelihood −8186.73 −2118.93 −1676.05 −12992.32 −1961.12 −192.52 −6957.24−1465.48−1535.78−11,001.47
−1307.65−130.14
Chibar2(01) 2314.58 747.31 212.94 4054.80 764.67 0.00 1265.70 269.32 172.05 2242.57 392.15 0.59
(0.000) (0.000) (0.000) (0.000) (0.000) (1.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.221)
In brackets the p-value. In italics the non-significant coefficients to 99%
T. Baumert
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Influence of Economic Sanctions:
Empirical Evidence for Iran and Russia
Anton Filipenko, Olena Bazhenova, Roman Stakanov, and Ihor Chornodid
Abstract In this chapter, the issues of the impact of sanctions on macroeconomic

indicators in the Islamic Republic of Iran and the Russian Federation have been
investigated. For this purpose, we used macroeconomic data during 1988–2018.
Thus, to investigate sanctions’ influence on the economies of Iran and Russia
panel vector autoregression model has been constructed. Impulse response functions
of model’s variables identify deterioration of macroeconomic indicators of both
countries in short run with stabilizing in 5 year-period. Dynamics of export
and imports of goods and services, gross capital formation, final consumption
expenditure of households, oil rent is characterizing by growing trends in short
run. At the same time, Dubai oil price index is falling, and then slightly increasing
during this period. However, unlike most variables, foreign direct investments inflow
demonstrates an inconsiderable increase. From our point of view, it can be explained
by returning of earlier withdrawn capital. Nevertheless, the unemployment rate
is rising insignificantly. Analysis of variance decomposition shows increase of
significant dependence on oil price growing from 5.6% in the first period to 25%
in the second one. Gross capital formation is the second most significant factor of
GDP growth in both countries. Imposing of sanctions constitutes near 4% of GDP
growth fluctuations in Iran and Russia.
Keywords Economic sanctions · Panel vector autoregression model ·

Macroeconomic indicators · GDP growth
JEL Classification: F51
A. Filipenko · O. Bazhenova () · R. Stakanov

Taras Shevchenko National University of Kyiv, Kyiv, Ukraine
I. Chornodid
Academy of Labour, Social Relations and Tourism, Kyiv, Ukraine
https://doi.org/10.1007/978-3-030-63970-9_24
346 A. Filipenko et al.
1 Introduction
Economic sanctions imposed against other states have been known for thousands
of years. Countries have always tried to influence their neighbors using various
methods. For instance, in ancient Greece in 423 BC Athens forbade merchants
from the Megara region to visit their markets that likely provoked the outbreak
of Peloponnesian Wars. Later the imposing of sanctions was stimulated by the
willingness to suppress international trade and accumulate money for the treasury.
As an example, some countries trading with China imposed bans to wear silk
clothes to undermine the Chinese economy. Moreover, there were a number of such
examples in the world history. In addition, the intensification of sanctions’ imposing
has risen significantly since the beginning of the twentieth century.
Two main concepts of the economic sanctions policy are realism and liberalism.
Realism is based on three main assumptions: sovereign states are the dominant
actors in the international economic policy; they are the maximizers of power; and
the state has a priority over the markets.
According to realists, international economic policy, including sanctions policy,
is formed primarily as a result of rational actions of the states in the struggle for
power and wealth.
The liberal approach rests on the assumption of the existence of rights and norms
for the imposition of sanctions. Norms and law should precede the imposition of
sanctions because they work as constitutive rules that determine the practice of
legislative coercion (i.e., sanctions).
International economic sanctions is a complex element in relations between
states and also a major foreign policy instrument, which can be a reason for
the breaking of existing relationships between them. Economic sanctions are the
means of economically developed and world-leading countries to influence the
behavior of other countries to show leadership and to encourage socioeconomic or
political changes in other states. By their nature, sanctions are intended to resolve
international conflicts in a more diplomatic way, without resorting to the use of
military force.
Based on the UN Security council resolution, the following types of sanctions,
applied by states or international organizations have a distinct economic charac-
ter:
• Trade (commercial) sanctions: full (comprehensive) embargo, partial (selective)
embargo, termination of maintenance, etc.
• Financial sanctions: suspension of financial assistance, blocking of government
foreign assets, and restriction of access to financial markets.
The specific effects of introduction of economic sanctions acquire various socioe-
conomic dimensions. Structural models are based on Leontief’s “input-output”
theoretical concepts and on extensive econometric tools. They allow assessing of
structural changes in the economic, demographic, technological, political, and other
nature, occurring as a result of introduction of sanctions policy (Leontief, 2006).
Influence of Economic Sanctions: Empirical Evidence for Iran and Russia 347
Threshold vector autoregressive (VAR) econometric models are used to determine

the threshold effects of economic sanctions policy in the context of SWOT analysis
(strengths, weaknesses, opportunity, threat, constraints, behavior of the sanctioned
countries, etc.) (Hashimzade & Thornton, 2013).
Some researchers use gravity models to estimate sanctions losses, for instance
(Hinz, 2017).
The list of researches has expressed different views regarding the impact of
international sanctions on the economic development of national economies. Dis-
cussions about the effectiveness of sanctions and the effects of losses are constantly
at the pivotal of international politics. Analysts give a comparative assessment of
the economic and political losses for the countries from imposing international
sanctions.
Thus, in this chapter we are attempting to study the practical aspects of interna-
tional economic sanctions mechanisms in the modern global economy on example
of sanctions’ influence on macroeconomic indicators of the Islamic Republic of Iran
and the Russian Federation.
2 Literature Review
Since 1950, more than 4000 scholarly papers has been published in the title of
which there is a combination “economic sanctions” due to results of the search via
Lens.org.
The first scholarly papers on economic sanctions were published in the late 1950s
and were devoted mostly to the issues of economic sanctions imposing on South
Africa, for instance, papers by Taubenfeld (1958) and Segal (1964). Wallensteen
(2000) highlighted the issues of the history of sanctions imposing in detail.
Moreover, there are a number of papers devoted to the economic sanctions
deploying against some countries, for example, South Africa, Iraq, Iran, Russia, etc.
(Ahmadi, 2018; Al-Samarrai, 2018; Åslund, 2020; Chawla, 1986; Clawson, 2012;
Hernández-Truyol, 2009; Levy, 1999; Sümer, 2015).
Here we are analyzing in detail issues concerning empirical aspects of economic
sanctions influence on economies all over the world.
Thus, in the paper (Shojai & Root, 2013) theoretical and empirical studies on
the effectiveness of economic sanctions since World War I have been analyzed. In
addition, the authors measured the impact of economic variables on the success
of economic sanctions based on econometric methods (ordinary least squares)
considering imposing economic sanctions as a random walk process.
Empirical analysis of US sanctions’ impact on its trade was conducted in Yang,
Askari, Forrer, and Teegen (2004) by using a gravity model. According to the results
of this research, there is only a reduction in trade with countries that are subjected
to comprehensive sanctions. Nevertheless, it is compensated by the increase in trade
between these countries and the EU or Japan.
Moreover, Fotourehchi (2019) explores the impact of multilateral-unilateral UN–

US economic sanctions on the natural environment of Iran in the short and long run.
The author uses autoregressive distributed lag model to investigate it for the period
1973–2017. Results have shown there are some improvements in Iran’s environment
due to sanctions imposing in the short run. However, sanctions cause deteriorating
effects in the long run.
Frank (2017) investigates the direct effects of sanctions on trade flows between
countries based on the gravity model the tool also used in Yang et al. (2004). As to
the research results, the imposing of sanctions cause a significant fall in the amount
of trade but no trade diversion as an instrument to mitigate sanctions’ effect.
In Afesorgbor and Mahadevan (2016), the authors revealed that financial and
trade sanctions’ imposing caused different effects on income inequality based on a
cross-country analysis of 68 target countries from 1960 to 2008. In addition, they
concluded that the duration of sanctions also matters. The longer the duration, the
more severe effect it will have.
Ahn and Ludema (2017) have explored the impact of deployed sanctions and
embargoes by the US and the EU against Russia after its intervention in Ukraine
in 2014 on microlevel of the economy. They have estimated losses of the average
sanctioned company or associated company. At the same time, the results showed
that the impact of oil prices has a larger effect on Russia’s economy.
In turn, Bali (2018) uses a country structural vector autoregression (CSVAR)
model to estimate sanctions’ impact on economic growth of the Russian and
European economies. In addition, results showed that Russia is the most influenced
by sanctions imposing economy with a quarter-on-quarter GDP growth fall of
3.25% after three quarters. The authors revealed that the impact of sanctions on
the European countries is much smaller.
Moreover, De Andrade and Carneiro (2014) found empirical proof that imposing
of sanctions causes the rise in the probability of better human rights practices, for
example, of 12 Latin American countries that are not under economic sanctions for
the period 1976–2004.
Mirkina (2018) concludes that high-cost sanctions provoke a significant fall in
foreign direct investments only in the short run based on data of 184 countries from
1970 to 2010 and bias-corrected estimators. However, in 1990s sanctions negatively
affected FDI in the short run as well. Nevertheless, this effect has been decreased in
the long run.
Based on empirical analysis, Hufbauer, Schott, Elliott, and Oegg (2007) provide
the following recommendations:
• Do not overestimate the prospects of achieving the political goals of sanctions,
especially against autocratic regimes in large countries;
• Implement sanctions decisively, not gradually;
• Economic sanctions sometimes do not exclude military intervention or covert
operations;
• To compare losses (own and allies) from sanctions with expected results, but
also does not exaggerate the losses with the aim not to devalue effect from sanctions.
Boldea and Hall (2013) have made testing structural instability in macroe-
conometric models, describing three main types of instability: parameter breaks,
other parameter instabilities, and model instabilities. The first notion (parameter
breaks) refers to fast parameter changes. The time of change means break-point in
econometric and change-point in statistics (in both cases are known and unknown
break-points). Other parameter instabilities have embodied the state-of-the-arts tests
for threshold models, smooth transition models, and Markov-switching models.
Third, category of tests describes model instabilities that are the functional forms
of the model allowed to change after a known and unknown break.
Economic sanctions are to large extent a common and reciprocal tool of
coercion in international relations. Though the prevalence of sanctions as a state
or international institutions policy tool, now there is no consensus on why sanctions
are imposed and whether they succeed in terms of policy objectives.
This chapter attempts to investigate this issue concerning economic sanctions
related to Russia and Iran.
Thus, to test the economic impact of sanctions, we examine the impact of economic
sanctions on Iran’s and Russia’s macroeconomic indicators.
The Middle East is one of the regions in the world where there is no clear,
regional, trendsetting leader in politics, economy, culture, and religion. The main
geopolitical regional confrontation for leadership is between Iran and Saudi Arabia.
To achieve this, the contenders are fighting with each other, but not directly,
but through the so-called “indirect” war in the territory of third countries. While
evaluating US policy on Iran, some experts and scholars have called it a strategy of
“containment” such as that used by US foreign policy during the Cold War against
the Soviet Union. Kennan G. proposed a strategy of “containment” at the beginning
of the Cold War, which formed the basis of the “Truman Doctrine”—the foreign
policy agenda of US President G. Truman (Kennan, 1946).
Sanctions on Iran firstly were imposed in 1979 and included a ban on trade
between the US and Iran. In 1995, for example, the economic sanctions were
imposed to prohibit the United States from investing in Iran’s energy sector and
the US trade and investment in Iran. Since 1996, according to ILSA (ISA after
2006), all foreign companies investing more than $20 million in developing oil
resources in Iran have come under two of seven possible US sanctions: refusal to
support the US Export-Import Bank, refusal to issue export licenses to companies
that violate the ban, ban on issuing loans from the US financial institutions for more
than $ 10 million over any 12-month period, prohibition to designate the principal
manager of public debt instruments in the United States, ban on acting as the US
agent or repository of the US government funds, refusal to participate in US public
procurement, and ban on all or some imports of the company. Later some other
economic sanctions were imposed banning banks and officials acting.
International sanctions on Russia were imposed in 2014 as the international

reaction to the aggression of the Russian Federation against Ukraine. On a whole,
sanctions were imposed by 41 countries including the US and the EU. There were
three stages of sanctions against Russia, the first stage of which was adopted in 2014.
It included suspension of the EU-Russia negotiation process on visa facilitation
and the new Partnership Agreement. Economic sanctions imposed on Russia also
include such items as export and import ban on weapons trade; ban on exports
to Russia of dual-use items for military purposes or for the Russian army and
restricting Russia’s access to strategic technologies, and services that can be used
for oil exploration and production.
So, in this research, we have investigated the influence of imposed sanctions on
the dynamics of macroeconomic indicators both in Iran and in Russia.
To investigate the sanctions’ influence on economies of the Islamic Republic of
Iran and the Russian Federation we have used macroeconomic indicators presented
in Table 1.
For this purpose, we used data of World Development Indicators, International
Financial Statistics, and Primary Commodity Prices databases during 1988–2018.
Some indicators, for instance, fuel exports as a % of commodity exports, were
not included in the model due to insufficient data. Dubai oil price index is used
as a benchmark for oil price produced in the Gulf countries and exported to Asian
countries.
SANCTIONS is a dummy variable and assumes a value of “0” for 2016, 2017, “1”
for 1988–2015 and 2018 (for the Islamic Republic of Iran) and “0” for 1988–2014
and “1” for period 2014–2018 (for the Russian Federation).
To test variables for unit root it has been used tests for panel data with common
(Levin, Lin and Chu, and Breitung t-statistics) and individual (Im, Pesaran and
Shin W-stat, ADF-Fisher Chi-square, PP-Fisher Chi-square) unit root processes.
The results of testing are presented in Table 2.
Table 1 The variables used in the model

Indicator Variable
Gross domestic product growth rate, % GDP_GR
Dubai oil price index DUBAI_CRUDE_IND
Exports of goods and services, % to GDP EXP_GDP
Foreign direct investments inflow, % to GDP FDI_NI_GDP
Gross capital formation, % to GDP GCF_GDP
Final consumption expenditure of households and nonprofit HH_FCS
institutions, % to GDP
Imports of goods and services, % to GDP IMP_GDP
Oil rent, % to GDP OIL_RENTS_GDP
Unemployment rate, % of labor force UNR
Variable that reflects the periods of sanctions imposing in the SANCTIONS
Islamic Republic of Iran and the Russian Federation
Table 2 Unit root testing results

Common unit root process Individual unit root process
Levin, Lin and Im, Pesaran and ADF-Fisher PP-Fisher
Chu t Breitung t-stat Shin W-stat Chi-square Chi-square
DUBAI_CRUDE_IND
Level 0.45966 −1.36816 −0.20773 3.47170 1.81491
1st differences −3.34677a −0.88745 −2.21704b 11.5514b 17.8032a
EXP_GDP
Level −2.20050b – −2.95035a 16.2868a 17.0277a
1st differences −4.90300a – −5.69525a 33.4822a 50.9387a
FDI_NI_GDP
Level 0.23434 −0.24949 0.77603 1.57683 2.22751
GCF_GDP
Level −2.76285a −1.27348 −2.41158a 14.7046a 10.0732a
1st differences −4.24724a −4.05820a −4.34129a 23.0601a 155.324a
GDP_GR
Level −1.47500c −2.62580a −1.31817c 9.18134c 14.1660a
1st differences −3.04756 a – −6.20149a 36.6843a 60.7466a
HH_FCS
Level −0.40653 0.31392 −0.94006 6.29764 8.95829c
IMP_GDP
Level −2.49240a −3.91181a −3.84207a 20.3828a 80.8671a
1st differences −4.49462 a – −5.90574a 34.7498a 38.8790a
OIL_RENTS_GDP
Level −0.49796 −0.74360 −0.58701 4.83545 6.62186
1st differences −5.48170a −6.60686a 39.4515a 43.9968
SANCTIONS
Level 1.92982 – 1.36133 0.17223 0.19054
1st differences −7.22022a – 36.8228a
UNR
Level −1.81852b −1.37602c −2.40866b 12.5343b 7.69170c
1st differences −4.05011 a −3.29458a 18.0551a 22.2323a
a Significance at 1%
b Significance at 5%
c Significance at 10%
The unit root testing results testify nonstationarity of almost all variables. Thus,
we used first differences of them while modeling the impact of sanctions imposing
on macroeconomic indicators both in Iran and in Russia.
Thus, to investigate sanctions influence on the economies of Iran and Russia we
have constructed panel vector autoregression model of the following form:Zit =

k
B0 + Bj Zit−j + ηit , Zit —vector of differenced endogenous variables, B0 —
j =1

vector of intercepts, Bj —coefficients matrix j = 1, k , ηit —disturbances.
We will consider the results of the model in the context of impulse response
analysis and variance decomposition. In turn, impulse response analysis consists of
analyzing the trajectory of variable returning to equilibrium state in case of deviation
from it due to shock to the system (Chernyak, Stavytskyy, Bazhenova, & Shebanina,
2014). In addition, the analysis of the decomposition of prediction error variances
of modeled variables allows determining the sources of their volatility after shock.
4 Result
So, to analyze the results of the model impulse response functions have been
constructed to identify the trajectories of variables return to equilibrium state, as
in Bazhenova and Chornodid (2018). In addition, the variance decomposition of
GDP growth difference has been analyzed to determine sources of its volatility.
Based on the results of unit root testing panel, VAR model has been constructed
using first differences of the variables. Besides this, the order of the model has been
chosen based on the results of information criteria toolkit. It was identified that the
model is stationary with lag 1.
Therefore, the panel vector autoregression model to investigate the sanctions’
influence on the macroeconomic indicators of Iran and Russia has the following
form:
⎛ ⎞ ⎛ ⎞
Δ exp gdpit Δ exp gdpit−1
⎜ Δdubaicrudeindit ⎟ ⎜ Δdubaicrudeindit−1 ⎟
⎜ ⎟ ⎜ ⎟
⎜ Δfdinigdp ⎟ ⎜ Δfdinigdp ⎟
⎜ it ⎟ ⎜ it−1 ⎟
⎜ Δgcfgdp ⎟ ⎜ Δgcfgdp ⎟
⎜ it ⎟ ⎜ it−1 ⎟
⎜ ⎟ ⎜ ⎟
⎜ Δgdpgrit ⎟ ⎜ Δgdpgrit−1 ⎟
⎜ ⎟ = B0 + B1 ⎜ ⎟ + ηit (1)
⎜ Δhhfcsit ⎟ ⎜ Δhhfcsit−1 ⎟
⎜ ⎟ ⎜ ⎟
⎜ Δimpgdpit ⎟ ⎜ Δimpgdpit−1 ⎟
⎜ ⎟ ⎜ ⎟
⎜ Δoilrentsgdp ⎟ ⎜ Δoilrentsgd ⎟
⎜ it ⎟ ⎜ it−1 ⎟
⎝ Δsanctionsit ⎠ ⎝ Δsanctionsit−1 ⎠
Δunrit Δunrit−1
Impulse response functions of model identify deterioration of most macroeco-

nomic indicators of both countries in short run with stabilizing in 5 year-period
(Fig. 1). Periods indicate years after shock (in this case—sanctions imposing).
Thus, dynamics of export and imports of goods and services, oil rent is
characterized by downward trends in the first 5 years after deploying sanctions. In
Response to Cholesky One S.D. Innovations± 2 S.E.

Response of D(DUBAI_CRUDE_IND) to D(SANCTIONS) Response of D(EXP_GDP) to D(SANCTIONS) Response of D(FDI_NI_GDP) to D(SANCTIONS)
15 0.5 .4
10 .3
0.0
5 .2
0 -0.5 .1
-5 .0
-1.0
-10 -.1
-15 -1.5 -.2

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Response of D(GCF_GDP) to D(SANCTIONS) Response of D(GDP_GR) to D(SANCTIONS) Response of D(HH_FCS) to D(SANCTIONS)

2
1.0
0.5
1
0.5
0.0
0
0.0
-0.5
-1
-0.5
-1.0
-2
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Response of D(IMP_GDP) to D(SANCTIONS) Response of D(OIL_RENTS_GDP) to D(SANCTIONS) Response of D(UNR) to D(SANCTIONS)

0.4 1.0 .4
0.5
0.0 .2
0.0
-0.4 -0.5 .0
-1.0
-0.8 -.2
-1.5
-1.2 -2.0 -.4

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Fig. 1 Impulse response functions of model’s variables
turn, gross capital formation dynamics is described by a slight decrease. However,

the final consumption expenditures of households are rising in the short run.
At the same time, Dubai oil price index is falling, and then slightly increasing
during this period. However, unlike most variables, foreign direct investments inflow
demonstrates an inconsiderable increase. From our point of view, it can be explained
by returning of earlier withdrawn capital. Nevertheless, the unemployment rate is
rising insignificantly.
Finally, gross domestic product growth demonstrates a slight increase in 3 year-
period, then 2 years decrease, and further stabilizing.
Analysis of variance decomposition of GDP growth shows increasing significant
dependence on oil price growing from 5.6% in the first period after shock to almost
25% in the second one (Table 3). Gross capital formation is the second most
significant factor of GDP growth in both countries. Influence of sanctions on GDP
growth is the third most important factor that constitutes nearly 4%. These results
in the context of oil price influence correspond with ones obtained in Bali (2018).
In addition, we would probably assume that economic sanctions significantly
influence the trade relations in Persian Gulf region, especially trade ties between
Iran and Emirates of Dubai, which will be the subject for further research.
Table 3 Variance decomposition of GDP_GR

Period dubai_crude_ind exp_gdp fdi_ni_gdp gcf_gdp gdp_gr
1 5.62 1.07 2.43 13.56 73.65
2 25.16 1.30 2.11 14.09 52.65
3 24.99 1.38 3.40 13.80 49.58
4 24.75 1.38 3.49 13.69 49.14
5 24.68 1.39 3.49 13.68 49.17
6 24.67 1.39 3.47 13.67 49.17
7 24.67 1.40 3.48 13.67 49.16
8 24.67 1.40 3.48 13.67 49.16
9 24.67 1.40 3.48 13.67 49.16
10 24.67 1.40 3.48 13.67 49.16
Period hh_fcs imp_gdp oil_rents_gdp sanctions unr
1 0.00 0.00 0.00 3.68 0.00
2 0.23 0.005 0.28 4.13 0.04
3 1.63 0.11 1.13 3.90 0.08
4 2.09 0.29 1.13 3.96 0.08
5 2.11 0.31 1.16 3.95 0.09
6 2.11 0.31 1.17 3.95 0.09
7 2.11 0.31 1.17 3.95 0.09
8 2.11 0.31 1.17 3.95 0.09
9 2.11 0.31 1.17 3.95 0.09
10 2.11 0.31 1.17 3.95 0.09
5 Conclusion
Although economic sanctions have their roots in political interrelations, they mainly
restrict economic relations leading to a decrease of economies’ performance and
destabilize not only the economy as a whole but also its various sectors.
To investigate the imposed sanction influence on economies of the Islamic
Republic of Iran and the Russian Federation we used macroeconomic indicators
of both countries during 1988–2018. For this purpose, we constructed first-order
panel vector autoregression model.
Impulse response functions of model identify deterioration of most macroeco-
nomic indicators of both countries in short run with stabilizing in 5 year-period.
Thus, dynamics of export and imports of goods and services, gross capital forma-
tion, final consumption expenditure of households, and oil rent are characterized by
growing trends in short run. At the same time, Dubai oil price index is falling, and
then slightly increasing during this period. However, unlike most variables, foreign
direct investments inflow demonstrates an inconsiderable increase. From our point
of view, it can be explained by returning of earlier withdrawn capital. Nevertheless,
unemployment rate is rising insignificantly. Analysis of variance decomposition
shows increasing significant dependence on oil price growing from 5.6% in the first
period to 25% in the second one. These results in the context of oil price influence
correspond to ones obtained in Bali (2018). Gross capital formation is the second
most significant factor of GDP growth in both countries. Influence of sanctions on
GDP growth is the third most important factor that constitutes nearly 4% for both
countries.
Currently, sanctions against Russia have achieved the effect of the country,s
collective responsibility, but have practically failed to achieve the political goals
of conflict resolution and personal responsibility. However, they did not allow the
further escalation of Ukraine’s territorial integrity violations and are a disincentive
for such violations of international law in the future on a global scale.
Finally, we probably assume that economic sanctions significantly influence
the trade relations in the Persian Gulf region that will be the subject for further
research.
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Corporate Governance and Its
Association with Audit Opinion:
The Case of Greece
Georgia Boskou, Maria Tsipouridou, and Charalambos Spathis
Abstract This study assesses the impact of: (1) internal controls and audit compli-
ance disclosures, (2) compliance with good corporate governance practices, and (3)
the level of earnings management, on the type of audit opinion issued by the external
auditor (unmodified opinion vs. unmodified with emphasis of matter paragraph), in
a “comply-or-explain” corporate governance regime. This study also examines if
these disclosures affect the number of issues identified in the emphasis of matter
paragraph of an unmodified opinion. Data on disclosures were hand-collected from
the annual reports of 341 companies listed on the Athens Stock Exchange, for
the period 2014–2015. The results indicate that internal controls and corporate
governance disclosures seem to have an impact on the type of audit opinion issued
by the external auditor, as well as on the number of issues included in the unmodified
opinion with emphasis of matter paragraph.
Keywords Internal controls · Corporate governance · External audit · Greece
1 Introduction
In the aftermath of high-profile corporate scandals and the global financial crisis,
corporate governance (CG), internal control (IC), and risk management have
received significant attention from academics, regulators, practitioners, and the
public (Altamuro & Beatty, 2010; Rezaee, 2009; Van de Poel & Vanstraelen, 2011).
G. Boskou ()
Department of Accounting and Information System, International Hellenic University, Thermi,
Greece
e-mail: boskoug@ihu.gr
M. Tsipouridou · C. Spathis
Division of Business Administration, Department of Economics, Aristotle University of
Thessaloniki, Thessaloniki, Greece
e-mail: mtsipouridou@econ.auth.gr; hspathis@econ.auth.gr
https://doi.org/10.1007/978-3-030-63970-9_25
358 G. Boskou et al.
Institutions such as stock exchanges, legislators, courts, or supervisory authorities

have set a number of governance rules as a necessary condition to make sure that
there is an adequate representation of the interest of shareholders and all relevant
constituencies (Becht, Bolton, & Röell, 2003). Regulatory responses have focused
on increasing disclosure requirements relating to CG. This has led to increased
awareness and demand for internal assurance on CG processes, including IC and
risk management (Soh & Martinov-Bennie, 2011).
Many organizations have been reevaluating their ICs and audit functions, either
on a mandatory basis, resulting from guidelines derived from the Sarbanes-Oxley
Act (SOX) 2002 and Security and Exchange Commission (SEC) rules, or on
a voluntary basis in “comply-or-explain” regimes. The European Commission
Directive 2006/46/EC follows the “comply-or-explain” principle with regard to CG
regulation, which means that the management of a company needs to comply with
the regulations of the Member State or explain and report why they have not done so
(EC, 2006). The CG Code (GCG Code, Boskou, Kirkos, and Spathis (2019)), which
was modified on June 28, 2013, follows the “comply-or-explain” approach for the
companies listed on the Athens Stock Exchange (ASE) (SEV, 2017). The GCG
Code aims at constant improvement of the Greek corporate institutional framework
and the wider corporate environment, as well as an increase in investors’ trust,
broadening at the same time the horizons of attracting entrepreneurial capitals.1
CG mechanisms help the Board of Directors and senior management to oversee
and manage the ever-changing risks of the company in an effective way (Beasley,
1996). One of these mechanisms, the ICs, was originally designed to help ensure
reliable accounting information, to safeguard companies’ assets and at the same
time to provide reasonable assurance of the reliability of financial reporting (COSO,
2013). In recent years, it has gained increased importance as a useful monitoring
mechanism in CG (Allegrini, D’onza, Melville, Paape, & Sarens, 2006; Chen,
Chung, Peters, & Wynn, 2017; Gramling, Maletta, Schneider, & Church, 2004;
Mihret & Admassu, 2011; Soh & Martinov-Bennie, 2011; Stewart & Subramaniam,
2010).
Additionally, the relation between ICs and external audit has been highlighted
in prior studies (Abbott, Parker, & Peters, 2012; DeZoort & Salterio, 2001; Lee &
Park, 2016; Prawitt, Sharp, & Wood, 2011). Internal audit can complement external
audit as the extent and nature of the work of external auditors are influenced by the
internal audit function of the company (Argento, Umans, Håkansson, & Johansson,
2018; Desai, Desai, Libby, & Srivastava, 2017; Munro & Stewart, 2011; Pike, Chui,
Martin, & Olvera, 2016). An effective and efficient system of internal controls
and internal audit can reduce substantive testing of external auditors and increase
reliability not only of the financial reporting output (i.e., financial statements) but
also of the audit report. If an auditor’s judgment is met with public trust, this is
considered as highly significant in the process of accepting audit functions that
add value, providing credibility at the same time to published financial statements
1 For more information on the GCG Code, please refer to Boskou, Kirkos, and Spathis (2019).
Corporate Governance and Its Association with Audit Opinion: The Case of Greece 359
(Arena & Azzone, 2009; Rezaee, 2004). Therefore, we need to consider carefully,
which monitoring mechanism can be used by corporations in order to ensure the
effectiveness of their IC (Krishnan, 2005).
The aim of this study is to examine if IC and CG disclosures, as well as earnings
management, of 341 companies listed on ASE, during the period 2014–2015, affect
the type of audit opinion issued by the external auditor. More specifically, we exam-
ine the relation between: (1) IC disclosures (as measured by segregation of duties,
authorization of transactions, and internal audit disclosures), (2) CG practices (as
measured by board size, nonexecutive board members, financial expertise of board
members and duality), and (3) earnings management (as proxied by abnormal
working capita accruals), with the type of audit opinion issued by the external
auditor (i.e., unmodified with emphasis of matter paragraphs or unmodified). We
also examine the effect of these variables on the number of issues identified in the
emphasis of matter paragraph.
Our results indicate that companies with more IC disclosures, and more board
members with financial expertise, are less likely to receive an unmodified opinion,
with emphasis of matter paragraphs. Moreover, when the role of the Chairman
and CEO are assigned to one person, then the unmodified opinion is accompanied
by emphasis of matter paragraphs. Also, the higher the number of nonexecutive
members on the Board of Directors, the higher the likelihood that the company
will receive an opinion with emphasis of matters. We also find that companies
that follow procedures where they segregate duties are more likely to have more
issues in the emphasis of matters paragraphs than companies without segregation.
Also, the detailed IC disclosures are associated with a reduced number of emphasis
issues. Duality reduces the effectiveness of the board, which is positively related to
the number of emphasis issues. Finally, neither the external audit opinion nor the
number of issues included in the emphasis of matter paragraphs is related to the
level of earnings management.
The reasons we conduct the study in Greece and specifically on companies,
which are listed in ASE are the following. Firstly, an updated CG code is applied in
Greece, in a “comply-or-explain” regime, which by its structure contains flexibility
on its application. Secondly, we aim at examining these relations in 2014 and 2015
during the peak of the economic crisis.
The rest of this chapter is organized as follows. In Sect. 2, the literature review
and hypotheses are presented, while Sect. 3 outlines the sample and the research
methodology employed in this study. Section 4 reports the empirical results and
Sect. 5 summarizes the main conclusions and implications of the study.
2 Literature Review and Hypotheses
2.1 Systems of Internal Controls
ICs quality is a significant factor in order to achieve good financial reporting policies
(Krishnan, 2005). A system of IC and audit is described as the set of procedures
that are put into force by the Board, management, and the rest of the staff of a
company, with the objective to ensure the effectiveness and the efficiency of the
company operations, the credibility of financial reporting, and the compliance with
the applicable laws and regulations (Kontogeorgis, 2013).
A number of studies assess the impact of effective IC on the type of audit
report issued by the external auditor. In the US, Section 404 of the Sarbanes-Oxley
Act and Auditing Standard No. 2 introduced integrated audits of IC over financial
reporting and the financial statements. Wagner and Dittmar (2006) and Shelton and
Whittington (2009) find that assessment of high company risks and a weakness
of disclosure of IC over financial reporting lead to unfavorable audit opinions.
Song, Thomas, and Yi (2010) confirm the positive effect of Section 404 on IC
reports and the IC’s quality influence on auditor opinion assessments. Hsu, Wang,
and Han (2014) indicate that the mechanisms of CG and audit systems are also
decisive factors to companies which constantly worry whether they will be able to
continue in operations. Goh, Krishnan, and Li (2013) examine whether the issuance
of an opinion with material weaknesses (MWO) in IC influences the issuance of
a going-concern audit opinion (GCO). Their results show that the issuance of an
MWO increases the probability of issuing a GCO and the auditors should consider
the overall effect of Section 404 on the financial statement audit. Jiang, Rupley,
and Wu (2010) examine whether IC quality is associated with auditors’ going-
concern assessments. In particular, they examine whether disclosures of material
IC weaknesses in SOX section 404 reports affect the auditors’ propensity to issue
going-concern opinions. The results provide evidence that firms with company
level IC material weaknesses (which are considered more severe) are strongly and
positively associated with the possibility to obtain a going-concern qualification.
Kirkos, Spathis, and Manolopoulos (2007) employ data mining techniques to
develop models capable of predicting the cases of qualified opinions. They use
C4.5 Decision Trees, Multilayer Perceptron Neural Networks, and Bayesian Belief
Networks, for a sample of 450 publicly listed UK and Irish firms. The results
indicate that financial distress, measured with the Altman’s Z-score, is strongly
associated with audit qualifications. Moreover, profitability matters are related
to qualifications, since all these three methods recognize the variable Return on
Shareholders’ Funds as significant. Leverage and sales performance have also been
found significant.
2.2 Corporate Governance
CG is an effective monitoring mechanism (Gul & Tsui, 2001), which increases the
transparency and reliability of financial information and ensures the integrity of
the financial reporting process (Watts & Zimmerman, 1986). Previous studies have
shown that CG characteristics, such as size, composition, and attributes of board
members, affect the quality of financial reports (Ballesta & Garcia-Meca, 2005;
Beasley, 1996; Farinha & Viana, 2009; Klein, 2002; Xie, Davidson III, & DaDalt,
2003). The Board of Directors also plays an important role due to its responsibility
primarily for the monitoring of the performance of executives and the achievement
of adequate performance for shareholders (Ballesta & Garcia-Meca, 2005). The size
and composition of the board are mainly used as indications of both the supervisory
and the advisory role of the Board (Klein, 1998). They can also affect the ability of
the board to be an effective tool for management control and to influence corporate
performance (Singh & Davidson III, 2003).
2.2.1 Board Size
The larger the board, the less effective it is expected to be, as the responsibility
for supervision will be spread among many directors, implying that the burden
and personal responsibility will be lower (Vafeas, 2000). A smaller board is
characterized by less bureaucracy and more functionality in terms of supervising
financial reporting. On the other hand, a larger board can be comprised of a wider
set of independent and experienced members, with accounting knowledge and
professional experience, which can lead to a better financial situation (Xie et al.,
2003). As far the quality of financial reporting is concerned, Beasley (1996) finds
a positive relationship between the number of board members and the likelihood of
accounting fraud and, in particular, fraudulent financial statements. In contrast, Xie
et al. (2003) argue that board size has a negative impact on earnings manipulation.
2.2.2 Board Composition
The composition of the Board of Directors by a majority of nonexecutive members

and the presence of many independent nonexecutive members is a good CG practice
internationally. Fama and Jensen (1983) argue that independent members, motivated
by the protection of their reputation, exercise better control over the executive
members of the board. CG Codes in various European countries, such as the UK
(Cadbury, 1992), Belgium (BSE-CBF Commission, 1998), Ireland (IAIM, 1999),
and Greece (GCG Code, 2013; Xanthakis, Tsipouri, & Spanos, 2003), suggest the
involvement of nonexecutive members in the boards of directors.
Various studies demonstrate the important role of nonexecutive members on
boards. Beasley (1996) argues that the percentage of nonexecutive directors is lower
in companies with falsified financial statements. Peasnell, Pope, and Young (2005)
argue that a large proportion of nonexecutive members in the Board of Directors
leads to compliance with the existing legislation, to integrity, to transparency, and
reliability of financial statements.
2.2.3 Financial Expertise
Previous research on legislation focuses primarily on the financial expertise of audit

committee members and its positive impact (Bédard, Chtourou, & Courteau, 2004;
Carcello, Hollingsworth, Klein, & Neal, 2006; Cohen, Krishnamoorthy, & Wright,
2004; Dhaliwal, Naiker, & Navissi, 2010; GCGC, 2013; SOX, 2002).
2.2.4 Duality
Duality is the practice where an individual serves both as Chairman of the Board
and CEO (Dalton, Hitt, Certo, & Dalton, 2007). Duality signifies the absence of
distinction between decision control and decision management (Fama & Jensen,
1983; Finkelstein & D’aveni, 1994). The concentration of powers on the same
person reduces the effectiveness of management monitoring (Finkelstein & D’aveni,
1994), which in turn can lead to a lack of transparency and to the high asymmetry
of information.
An overview of CG codes in various European countries, such as the UK
(Cadbury Report, 1992), Belgium (BSE-CBF Commission, 1998), and Greece
(GCG Code, 2013), proposes the separation of roles between the Chair and the CEO.
Given the risk of overconcentration of power on one individual, it is internationally
proposed to distinguish between the roles of Chairman and CEO (OECD, 2004).
By separating these two roles, it would be possible to avoid concentrating too much
power on a single individual within the body. Many researchers have emphasized
board independence as a primary requirement for its performance in monitoring
and controlling functions (Kim, Song, & Zhang, 2009). Therefore, companies with
Chairman duality are more likely to be associated with fewer disclosures (Gul &
Leung, 2004).
2.3 Earnings Management
When it comes to earnings management, our focus is on discretionary accruals.

Based on various studies, the underlying assumption is that managers use abnormal
or discretionary accruals to manipulate earnings, negatively affecting the quality
of financial statements (Dechow, Sloan, & Sweeney, 1995; Healy & Wahlen,
1999). However, studies are divided. Francis and Krishnan (1999) found in their
research that companies with high absolute accruals value tend to receive opinions
with comments in contrast to companies with low absolute accruals value. This
correlation tends to be stronger as the accruals get negative values. Correspondingly,
Bartov, Gul, and Tsui (2001) found that there is a positive correlation between
the absolute value of accruals and audit opinion. Finally, Butler, Leone, and
Willenborg (2004) and Arnedo, Lizarraga, and Sánchez (2008) argue that there is a
negative correlation between accruals and the likelihood of receiving opinions with
comments, and in particular with going-concern issues.
2.4 The Greek Case and Hypotheses
A number of research studies, based on domestic data, have been conducted in

Greece regarding the quality and effectiveness of ICs, CG, earnings management,
and the impact they have on the external auditor’s opinion and on the financial
aspects of the audited companies.
Spathis (2003) developed a model, which can predict the audit opinion of external
auditors by combining financial and nonfinancial information. The developed
model could predict qualified audit reports with 78% classification success rate.
Subsequently, Spathis, Doumpos, and Zopounidis (2003), using Greek data and a
multicriteria decision and classification method, the UTADIS multicriteria method,
designed a prediction model for external auditors’ opinions. The results showed that
ratios such as the receivables/sales ratio and the net profit/total assets ratio can be
used to predict qualified/clean reports from auditors. Caramanis and Spathis (2006)
developed a model to explain the audit qualifications of Greek companies. Their
results, of a sample of 185 companies listed in ASE, indicate that profitability and
liquidity are the major factors that lead to qualified opinions. Low performers or
firms with liquidity problems are more likely to receive a qualified audit report.
Tsipouridou and Spathis (2012) examined the relationship between earnings
management, as assessed on the basis of discretionary accruals and auditor report-
ing, as assessed (1) by the size of the audit firm (big4, non-big4) and (2) the type
of audit opinion (qualified vs. unqualified), using a sample of companies listed on
ASE for the 5 years 2005–2009. The results show that the firm size (big4, non-big4)
does not affect the audit opinion type. Audit opinions with comments are not issued
on the basis of management’s opportunistic behavior. Furthermore, Big4 audit firms
are more likely to issue unqualified audit reports, which are attributed to customer
characteristics rather than audit firm size (big4, non-big4). Also, abnormal accruals
are not related to the type of opinion issued by the auditors. Tsipouridou and
Spathis (2014) examined the relationship between audit opinion report and earnings
management, as measured by discretionary accruals. According to the results, audit
opinion report type is not related to earnings management. On the contrary, going-
concern audit opinions are subject to the financial characteristics of the companies,
such as size and profitability of the audited entity, as well as to the opinion of the
external auditor of the previous year.
Nerantzidis (2015) conducted a research on the effectiveness of the “comply-

or-explain” approach in Greece. He content analyzed CG statements and sample
companies’ websites of 144 Greek listed for the year 2011. The results showed
that the compliance rate was low (35.27%), while the result of the noncompliance
explanation is still lower (out of 64.73% of the noncompliance, 40.95% provide no
explanation). Companies, on the one hand, tend to avoid compliance with the code’s
proposed practices, on the other hand, they do not align with the spirit of the CG
Code, as they avoid providing adequate explanations.
Drogalas, Karagiorgos, and Arampatzis (2015) identify the factors that influence
the effectiveness of internal audit. The results showed that the factors affecting
the effectiveness of internal audit are (1) the quality of internal audit, (2) the
responsibilities of the internal audit team, (33) the independence of internal audit,
and (4) the support of management. A further important factor is the independence
of internal audit, which is the core of the effectiveness of internal audit. In a follow-
up study, they demonstrated that CG is positively associated with the advisory role
of internal audit in the quality of internal audit and the audit committee (Drogalas et
al., 2015). Drogalas, Pazarskis, Anagnostopoulou, and Papachristou (2017) found
that the effectiveness of internal audit as well as the responsibility and training of
the internal auditor can positively influence fraud detection.
Koutoupis, Pazarskis, and Drogalas (2018) examine the interaction of the
financial crisis with CG and risk management. They conduct their research through
structured questionnaires to 45 listed companies on ASE. The conclusions show
that the role of internal auditors is limited to the verification and confirmation of
the compliance with existing laws and regulations, rather than the adoption of an
advisory role for the improvement of the content and quality of CG information.
Finally, in a survey based on stock market data from a sample of 30 Greek and Italian
companies for the period 2008–2012, Koutoupis and Bekiaris (2019) demonstrated
that the independence of the audit committee and the number of audit committee
meetings has a negative impact on company performance, while the background and
skills of the audit committee members do not appear to have a significant impact on
the performance of the company.
2.4.1 Hypotheses
In this study, we focus on whether ICs and audit function disclosures, good CG
practices, and earnings management have an effect on the type of audit opinion
issued by the external auditor. Therefore, we formulate our hypotheses in the null
form as follows:
In a “comply-or-explain” CG regime:
H1a: internal controls and audit function disclosures are not associated with the type of
audit opinion (unmodified vs. unmodified with emphasis of matter paragraph) issued by the
external auditor.
H1b: good corporate governance practices are not associated with the type of audit
opinion (unmodified vs. unmodified with emphasis of matter paragraph) issued by the
external auditor.
H1c: earnings management is not associated with the type of audit opinion (unmodified
vs. unmodified with emphasis of matter paragraph) issued by the external auditor.
In addition, we aim to investigate whether these disclosures affect the number

of issues reported in the unmodified audit opinion with an emphasis of matter
paragraph. Therefore, our next set of hypotheses are stated as follows:
H2a: internal controls and audit function disclosures are not associated with the number of
issues reported in the unmodified opinion, with an emphasis of matter paragraph.
H2b: good corporate governance practices are not associated with the number of issues
reported in the unmodified opinion, with an emphasis of matter paragraph.
H2c: earnings management is not associated with the number of issues reported in the
unmodified opinion, with an emphasis of matter paragraph.
3 Sample and Methodology
3.1 Sample
The initial sample is comprised of 341 companies listed on ASE in December 2014
and 2015, as shown in Table 1. In line with previous studies, we exclude from the
sample financial, insurance, and property estate companies, due to differences in
reporting and disclosure policies. We also exclude companies that are on suspension,
as their data is not available, and companies whose 12-month financial year does not
coincide with the calendar year (1/1–31/12) but with the taxable year (1/7–30/6).
This leaves us with a final sample of 341 companies. We retrieve financial data from
Datastream. Data relevant to the ICAF and external audit are hand-collected from
the annual reports of the respective companies and content-analyzed. We base our
study on annual reports of 2014 and 2015 when the reformed CGC of 2013 was
starting to be gradually enacted.
Table 1 Sample of companies

Companies listed on ASE 2014–2015 462
Companies from financial, insurances, and property sectors 66
Companies on suspension 42
Companies with different calendar and taxable year 12
Companies with missing data 1
Final sample 341
3.2 Methodology
We use regression analysis to examine the association between: (1) internal control
and audit function disclosures (IC), (2) corporate governance practices disclosures
(CG), and (3) earnings management (DA) and the external auditors’ opinion. In its
general form, the model is presented as:
Y = f (IC, CG, DA, control variables)
where Y is the dependent variable related to the external auditors’ opinion. More
specifically, our model is described in (1) as follows:
AOEi or NoMi = β0 + β1 SEGRDUTIESi + β2 AUTHORIZATIONi

+ β3 ICDISCLOSUREi + β4 BOARDSIZEi + β5 NONEXEMEMBi
+ β6 FINEXPERTISEi + β7 DUALi + β8 AWCAi + β9 CRi + β10 ROAi
+ β11 LEVi + β12 CF0i + ei (1)
The dependent variables are: 1) Audit Opinion with Emphasis (AOE), which is a
dummy variable that represents either an unmodified opinion, which takes the value
of 0 or an unmodified opinion with an emphasis of matter paragraph, which takes
the value of 1 and 2) Number of Matters (NoM), which is the number of issues
included in the unmodified opinion with emphasis of matter paragraph. It should
be mentioned that our sample does not include modified opinions. Therefore, we
use the distinction between unmodified opinions and unmodified opinions with an
emphasis of matter paragraph.
We use three sets of test variables to capture IC and CG practices and earnings
management. IC compliance disclosures are represented by three variables: (1)
SEGR_DUTIES is a dummy variable that takes the value of 1 if the areas of
responsibility and assigning task to employees are defined, and incompatible duties
are vested in different people, otherwise it equals 0; (2) AUTHORIZATION is a
dummy variable that takes the value of 1 if the entity requires proper authorization
procedures in order to safeguard its physical assets and protect the integrity of
its records, otherwise it equals 0; and (3) IC_DISCLOSURE is the number of
words used by the company to describe its ICs, emphasizing on the process of
preparing transparent and reliable financial statements. CG practices are measured
by four variables: (1) BOARD_SIZE, which is the size of the Board of Directors, (2)
NON_EXE_MEMBERS is the percentage of nonexecutive directors on the board,
(3) FIN_EXPERTISE is the percentage of board members with financial education
and experience, and (4) DUAL is a dummy variable equal to 1 if the Chairman
of the Board is also the Chief Executive Officer, 0 otherwise. Finally, we proxy
earnings management using the absolute value of abnormal working capital accruals
(AWCA), as measured by DeFond and Park (2001).
We also include a number of control variables that have been commonly used
in prior literature; CR is measured as current assets divided by current liabilities;
ROA is Return on Assets (ROA) and measured as net income to total assets (El-
Mahdy & Park, 2014); LEV is the ratio of total debt to total assets (Batsinilas &
Patatoukas, 2012); and CFO is cash flows from operations to total assets. CFO
shows how effective a business is in the employment of its assets. High performance
can signal a bright future for the company as it will have more cash flows to reinvest
for growth and return to shareholders. Detailed definitions of all variables included
in the model are provided in Appendix.
4 Empirical Results
4.1 Descriptive Statistics
The descriptive statistics of the full sample of 341 companies are presented in
the following tables. In Table 2, where the categorical variables are presented, it
is shown that nearly 30% (102 of 341) of the companies in our sample receive
unmodified opinions with emphasis of matter paragraphs. Segregation of duties in
the systems of IC is disclosed by 111 of 341 companies, which means that only
33% of companies understand that it is very important to have a clear separation of
duties and responsibilities at all levels of operation. Similarly, 36% of the sample
follow authorization procedures, indicating the need for any transaction to require
authorization from an overriding authority. With respect to duality, in 44% of
companies the Chairman is also the CEO.
In Table 3 the descriptive statistics of the continuous variables are presented.
The sample companies have, on average, one matter identified and disclosed in
the emphasis of matter paragraph, while the average number of words for the
disclosures of IC is 539. Regarding the CG variables, the average board size
is around eight members, and 26% have qualifications in financial studies and
respective financial experience. The average value of AWCA, in absolute terms,
is 0.063, which indicates that the sample companies have low abnormal working
capital accruals, i.e., earnings management. The sample companies have an average
CR of 1.477, which means that their liquidity is satisfactory, and an average ROA
of −0.006.
Table 2 Descriptive Total (NO) (YES)

statistics of categorical
variables, full sample AOE 341 239 102
2014–2015 SEGR_DUTIES 341 230 111
AUTHORIZATION 341 217 124
DUAL 336 187 149
Note: All variables are defined in Appendix
Table 3 Descriptive statistics of continuous variables, full sample 2014–2015

Total Min. Max. Mean SD
NOM 341 0 8 0.960 1.732
IC_DISCLOSURE 341 0 1.827 539.310 359.198
BOARD_SIZE 333 3 16 8 2.254
NON_EXE_MEMB 331 0 0.846 0.274 17.513
FIN_EXPERTISE 330 0 1 0.256 30.642
AWCA 324 0 0.690 0.063 0.093
CR 329 0 9.110 1.476 1.237
ROA 330 −0.38 0.290 −0.006 0.088
LEV 331 0.07 5.980 0.738 0.631
CFO 331 −0.40 0.580 0.036 0.081
More detailed descriptives and univariate analyses are presented in Table 4; in

Panel A for the continuous and in Panel B for the categorical variables, respectively.
In panel A, companies with AOE have, on average, more nonexecutive board
members (32%) and are less financially expert, in comparison to companies without
emphasis of matter paragraphs. In addition, companies with AOE have higher
absolute AWCA, lower CR, lower ROA, higher Leverage, and lower CFO compared
to companies with unmodified opinions without emphasis of matters. The large
differences in average values of variables between the two group of firms and
the high statistical significance (p < 0.001) indicate that the independent variables
may indeed be related to audit opinion decisions. In panel B, we see that there are
significant differences, at the 5% level, between companies with and without AOE,
with respect to segregation of duties, authorization procedures, and duality.
Finally, Table 5 presents Pearson correlations between the variables. AOE and
NOM are negatively related with CR (−0.357 and −0.351, respectively), at the
1% significance level, and also with ROA (−0.432 and −0.489, respectively)
which indicates that companies that are less liquid and less profitable are more
likely to receive an audit opinion with an emphasis of matter paragraph and also
are likely to receive more qualifications in the emphasis of matters paragraph.
Companies with high AWCA and leverage tend to obtain AOE reports or to receive
more qualifications in the emphasis of matters paragraph. There are no high and
statistically significant correlations between our dependent and test variables. To
empirically test our hypotheses, we also conduct regression analysis.
4.2 Regression Results

4.2.1 Hypothesis 1
Hypotheses 1a, 1b, and 1c examine the relation between: (1) IC disclosures (as
measured by segregation of duties, authorization of transactions, and internal audit
Table 4 Descriptive statistics of continuous and categorical variables, full sample

Panel A
Unmodified opinion
Unmodified opinion with emphasis of matter
Continuous variables Mean SD Mean SD t-test Sig (two-tailed)
IC_DISCLOSURE 545.590 397.026 524.610 250.159 0.493 0.622
BOARD_SIZE 7.950 2.204 7.370 2.323 2.195 0.029
NON_EXE_MEMB 25.525 16.241 31.795 19.508 −3.036 0.003
FIN_EXEPTISE 25.685 30.712 25.202 30.633 0.132 0.895
AWCA 0.049 0.065 0.097 0.133 −4.411 0.000
CR 1.767 1.225 0.792 0.970 6.998 0.000
ROA 0.020 0.070 −0.062 0.099 8.547 0.000
LEV 0.539 0.355 1.211 0.856 −10.110 0.000
CFO 0.045 0.087 0.015 0.061 03.140 0.002
Panel B
Unmodified opinion with
Categorial variables Unmodified opinion emphasis of matter x2 Sig.
SEGR_DUTIES (no) 170 60 4.931 0.026
(yes) 69 42
AUTHORIZATION (no) 161 56 4.798 0.028
(yes) 78 46
DUAL (no) 140 47 5.442 0.020
(yes) 94 55
disclosures), (2) CG practices (as measured by board size, nonexecutive board

members, financial expertise of board members, and duality), and (3) earnings
management (as proxied by abnormal working capita accruals), with the type of
audit opinion issued by the external auditor (i.e., unmodified with emphasis of
matter or unmodified). In Table 6, we report the empirical results for the full sample
and for 2014 and 2015 separately.
With respect to H1a, we find that only IC_DISCLOSURE is negatively related to
AOE and statistically significant at the 5% level (two-tailed) for the full sample. The
negative sign of the IC_DISCLOSURE shows that the more a company discloses
about its IC and audit procedures, the less likely it is to receive an unmodified
opinion with emphasis of matter paragraphs. A written report on IC in the annual
report is used to document its quality. As there is not a standardized report of IC
disclosures that a company should prepare, each company describes its IC system
as it deems appropriate. A high level of IC system disclosures, as measured by
the word count in the annual report, facilitates knowledge and understanding of
what is happening in an entity’s internal operations. It could also mean that the
company is more transparent and that it applies an IC system that is adequate and
effective, capable of identifying and managing weaknesses and risks. This could
reduce the possibility of the company receiving an audit opinion with qualifications
or emphasis of matter paragraphs.
370
Table 5 Pearson correlation coefficients between the variables, full sample

Variable 1 2 3 4 5 6 7 8 9 10 11 12 13 14
1.AOE 1
2. NOM 0.830** 1
3. SEGR_DUTIES 0.032 0.083 1
4. AUTHORIZATION 0.128* 0.134* 0.569** 1
5. IC_DISCLOSURE 0.005 −0.004 0.326** 0.443** 1
6. BOARD_SIZE −0.121* −0.198** 0.134* 0.097 0.230** 1
7. NON_EXE_MEMB 0.178** 0.116* 0.096 0.156** 0.153** 0.279** 1
8. FIN_EXPERTISE 0.001 0.043 0.087 0.087 0.233** 0.024 0.013 1
9. DUAL 0.113* 0.144** −0.079 −0.089 −0.044 −0.217** −0.049 0.007 1
10. CR −0.357** −0.351** −0.043 −0.118* −0.100 0.177** 0.106 −0.091 0.084 1
11. AWCA 0.247** 0.288** −0.030 0.082 0.027 −0.183** 0.005 0.057 0.125* −0.046 1
12. ROA −0.432** −0.489** 0.010 −0.026 −0.021 0.253** 0.071 −0.109 −0.016 0.359** −0.422** 1
13. LEV 0.456** 0.524** 0.053 0.111* 0.111* −0.181** −0.003 0.078 0.085 −0.450** 0.415** −0.524** 1
14. CFO −0.173** −0.190** 0.011 0.112* 0.050 0.034 0.039 0.010 0.101 0.210** 0.128* 0.475** −0.143** 1
Notes: * Correlation is significant at the 0.01 level (two-tailed); ** Correlation is significant at the 0.05 level (two-tailed)
G. Boskou et al.
Table 6 Logistic regression analysis of dependent variable AOE

Coefficient
Variable 2014–2015 2014 2015
Constant −2.913*** −8.079*** −0.961
SEGR_DUTIES −0.341 −1.531 0.297
AUTHORIZATION 0.463 0.411 0.626
IC_DISCLOSURE −0.001** 0.000 −0.003***
BOARD_SIZE 0.111 0.145 0.095
NON_EXE_MEMB 0.032*** 0.043*** 0.035**
FIN_EXPERTISE −0.011* −0.020** −0.004
DUAL 0.749** 1.517** 0.248
AWCA 3.059 1.858 7.602
CR −0.801*** −0.411 −1.049**
ROA −11.138*** −10.596* −11.489**
LEV 02.127*** 6.742*** 0.658
CFO −1.526 −1.765 0.515
Cox & Snell R-Square 0.397 0.486 0.390
Nagelkerke R-Square 0.558 0.682 0.548
Overall Classification % 88.2 88.4 88.0
*, **, *** significance at the 0.10, 0.05, and 0.01 level (two-tailed), respectively
Regarding H1b, Table 6 shows that NON_EXE_MEMB is positively related to

AOE at the 1% significance level; the higher the number of nonexecutive members
on the Board of Directors, the higher the likelihood that the company will receive an
opinion with emphasis matters. This is a paradoxical result since boards consisting
of more nonexecutive members are considered more independent and exercise better
supervision (Beasley, 1996; Klein, 2002).2 One possible explanation is that despite
the fact that nonexecutive members are not involved in the day-to-day operations of
the company and are considered independent, they nonetheless work very closely
with executive members, which may create a threat to their independence. In
addition, FIN_EXPERTISE is negatively related to AOE at the 10% significance
level, which means that the higher the number of board members with financial
studies and expertise, the more efficient and effective the board can be in its role and
responsibilities regarding financial reporting, reducing the likelihood of receiving
an opinion with emphasis of matter paragraphs. DUAL is positively related to AOE
at the 5% significance level. When the role of the Chairman and CEO is assigned
to one person, then the unmodified opinion tends to be accompanied by matter of
2 Thelaw on public limited companies places great importance on the composition of the Board of
Directors and on the proportion of executive and nonexecutive members. According to the CG Law
3016/2002 of listed companies, the Board of Directors should consist of at least 1/3 of nonexecutive
members. The adoption of this good CG practice aims to ensure that boards with a higher ratio of
nonexecutive to executive members have greater independence and objective oversight.
Table 7 Regression results Coefficient

of the dependent variable
Variable 2014–2015 2014 2015
NOM
Constant 0.654* 0.303 0.832
SEGR_DUTIES 0.705*** 0.430 1.003***
AUTHORIZATION 0.158 0.107 0.178
IC_DISCOSURE −0.001*** −0.001 −0.001***
BOARD_SIZE −0.023 −0.030 −0.005
NON_EXE_MEMB 0.014*** 0.012* 0.017***
FIN_EXPERTISE −0.002 −0.003 0.000
DUAL 0.493*** 0.672*** 0.301
AWCA 1.041 0.059 3.393**
CR −0.208*** −0.180 −0.223**
ROA −6.120*** −5.797*** −6.594***
LEV 0.642*** 1.097*** 0.230
CFO −1.224 −0.793 −1.053
Adjusted R square 0.449 0.488 0.461
F statistical 21.636 11.271 11.624
Sig. 0.000 0.000 0.000
*, **, *** significance at the 0.10, 0.05, and 0.01 level (two-
tailed), respectively
emphasis. It is likely that the combination of the two roles could reduce the board’s
independence.
H1c is accepted, as the results indicate that the level of AWCA, in absolute terms,
does not affect the type of audit opinion issued by the external auditor. Finally, the
higher the liquidity (CR) and profitability (ROA) of the company, and the lower its
leverage (LEV), the lower the likelihood that the company will receive an AOE.
4.2.2 Hypothesis 2
Hypotheses 2a, 2b, and 2c examine the relation between (1) IC disclosures (as
measured by segregation of duties, authorization of transactions, and internal audit
disclosures), (2) CG practices (as measured by board size, nonexecutive board
members, financial expertise of board members, and duality), and (3) earnings
management (as proxied by abnormal working capita accruals), with the number
of issues reported in the unmodified opinion with emphasis of matter paragraphs. In
Table 7, we report the empirical results for the full sample and for 2014 and 2015
separately.
With respect to H2a, we find a positive and statistically significant relation at
the 1% level between SEGR_DUTIES and NOM; paradoxically, companies that
follow procedures where they segregate duties are more likely to receive more
issues in the emphasis of matters paragraphs than companies without segregation.
IA_DISCLOSURE is negatively related to NOM at the 1% significance level,

indicating that the detailed description of the IC functions is associated with a
reduced number of emphasis issues. Regarding H2b, NON_EXE_MEMB and DUAL
are positively related to NOM. Duality reduces the effectiveness of the board, which
is positively related to the number of emphasis issues.
H2c is accepted, as the results indicate that the level of AWCA, in absolute
terms, does not affect the number of issues included in the unmodified opinion with
emphasis of matter paragraph. Finally, the higher the liquidity (CR) and profitability
(ROA) of the company, and the lower its leverage (LEV), the lower the number of
issues included in the emphasis of matter paragraph.
5 Conclusion
The purpose of this study was to provide insights about the IC and CG disclosures
of a company, as well as its earnings management, and their association with the
external audit opinion, in a “comply-or-explain” CG regime. More specifically, we
examined the relation between IC and audit function compliance disclosures, CG
disclosures and earnings management, and their association with the type of audit
opinion issued by the external auditor (unmodified vs. unmodified with emphasis of
matter paragraphs). We also examined their effect on the number of issues identified
in the emphasis of matter paragraph.
With respect to Hypothesis 1, the results indicate that more IC disclosures,
and more board members with financial expertise, are associated with lower
probability of the company receiving an unmodified opinion with emphasis of
matter paragraphs. Moreover, when the role of the Chairman and CEO are assigned
to one person, then the unmodified opinion is accompanied by emphasis of matter
paragraphs. Also, the higher the number of nonexecutive members on the Board
of Directors, the higher the likelihood that the company will receive an opinion
with emphasis matters. With respect to Hypothesis 2, we find that companies that
follow procedures where they segregate duties are more likely to receive more issues
in the emphasis of matters paragraphs than companies without segregation. Also,
the detailed description of the IC functions is associated with a reduced number of
emphasis issues. Duality reduces the effectiveness of the board, which is positively
related to the number of emphasis issues. Finally, neither the external audit opinion
nor the number of issues included in the emphasis of matter paragraphs is related to
the level of earnings management.
This study has some limitations. First, caution is advised in the generalisability
of the results, as we should take into consideration the specific characteristics of the
Greek setting. Second, the empirical analysis is conducted covering only 2 years
of data. Hence, future research could extend the number of years examined, in
order to broaden our knowledge on the impact of IC and CG disclosures in audit
opinions issued by external auditors. Future research could also expand the IC and
CG variables to make them more inclusive and/or representative.
A.1 Appendix: Definition of Variables
Data
Variable Definition Source
Dependent variables
AOE = Audit opinion with emphasis is a dummy variable that Annual
represents either an unmodified opinion or an report
unmodified opinion with an emphasis of matter
paragraph. It is a dummy variable equal to 1 if the
unmodified opinion has an emphasis of matter
paragraph, 0 otherwise
NOM = Number of matters is the number of issues included in Annual
the unmodified opinion with emphasis of matter report
paragraph
Test variables
SEGR_DUTIES = Segregation of duties is a dummy variable that takes Annual
the value of 1 if the areas of responsibility and report
assigning task to employees are defined and
incompatible duties are vested in different people,
otherwise it equals 0
AUTHORIZATION = Dummy variable that takes the value of 1 if the entity Annual
requires proper authorization procedures in order to report
safeguard its physical assets and protect the integrity
of its records, otherwise it equals 0
IC_DISCLOSURE = The number of words used to describe the internal Annual
controls in annual reports, paying particular attention report
to the processes of preparing transparent and reliable
financial statements
BOARD_SIZE = The number of members on the Board of Directors Annual
report
NON_EXE_MEMB = The percentage of nonexecutive members on the Annual
Board of Directors report
FIN_EXPERTISE = The percentage of board members with financial Annual
education and experience report
DUAL = Duality is a dummy variable that presents the practice Annual
of assigning two roles simultaneously to one person, report
the Chairman of the Board and the Chief Executive
Officer. In this case, the variable gets the value 1,
otherwise the value is 0
AWCA = The absolute value of abnormal accruals is calculated Datastream
according to De Fond and Park (2001), as follows:
AWCAt = WCt − [(WCt − 1/St − 1) * St], where
WC = (asset- and short-term
investments)—(short-term liabilities-short-term loans)
and S = sales.
All variables are scaled to total assets.
(continued)
Data
Variable Definition Source
Firm-specific control variables
CR Current ratio is measured as current assets divided by Datastream
current liabilities
ROA = Return of assets is measured as the ratio of net income to Datastream
total assets
LEV = Total debt to total assets Datastream
CFO = Cash flow from operating activities to total assets Datastream
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and Urbanization in Greece
Pavlos Stamatiou, Chaido Dritsaki, and Dimitrios Niklis
Abstract The objective of this study is to explore the relationship between energy
consumption, carbon dioxide (CO2 ) emissions, urbanization, trade, and economic
growth of Greece, in the environmental Kuznets curve (EKC) model, for the period
2000–2017. We investigate this relationship using the vector error correction model
(VECM) and we employ the Granger causality technique in order to explore the
presence of causality among the examined variables. The long-run results confirm
bidirectional causal relationships between economic growth and CO2 emissions,
as well as between CO2 emissions and trade openness. In addition, there exist
unidirectional Granger causalities that run from energy consumption to trade and
from urbanization to CO2 emissions. In the short run, the results reveal that there is a
causal relationship between economic growth and urbanization, with direction from
economic growth and urbanization. The Greek government is advised to emphasize
on the use of renewable energy and clean technologies of renewable energy in order
to achieve lower levels of emissions.
Keywords CO2 emissions · Economic growth · Energy consumption · Trade ·

Urbanization · Causality test
JEL Classification: C32, Q43, Q53, Q56
1 Introduction
Environmental issues are of utmost importance in the recent decades. Energy is

considered to be one of the most important elements of the prosperity of an
economy. Global demand for energy increases, while conventional energy sources
P. Stamatiou · C. Dritsaki () · D. Niklis

Department of Accounting and Finance, University of Western Macedonia, Kozani, Greece
e-mail: cdritsaki@uowm.gr; dniklis@uowm.gr
https://doi.org/10.1007/978-3-030-63970-9_26
380 P. Stamatiou et al.
are limited and their quantities decline rapidly. Hossain (2011) points out that
Carbon dioxide (CO2 ) is regarded to be the main source of greenhouse effect and
most of the CO2 emissions come from fossil fuel consumption such as coal, oil, and
gas. One of the above reasons was the fast economic growth and the expansion
of industrialization which has caused intensive use of energy and other natural
resources.
Many researchers investigate the relationship between energy consumption and
economic growth (Apergis & Payne, 2009; Baranzini, Weber, Bareit, & Mathys,
2013). A considerable number of studies come to the result that energy consumption
and economic growth may generate considerable pressure on the environment qual-
ity (Arouri, Ben Youssef, M’henni, & Rault, 2012; Tiwari, Shahbaz, & Hye, 2013).
Another interesting topic, especially for oil-rich countries is the relationship
between economic growth and environmental pollution. According to Bekhet,
Matar, & Yasmin, 2017, only 0.61% of the world’s population resides in Gulf
Cooperation Council (GCC) countries, but they contribute about 2.4% of the total
global greenhouse gas (GHG) emissions.
Other focuses on the link between energy consumption and macroeconomic
variables (Jamel & Derbali, 2016; Ozturk & Acaravci, 2010).
According to Jamel and Maktouf (2017), various econometric methods such as
(1) the structural break unit root test; (2) the cointegration test for long run linkage
among the variables; (3) the ordinary least squares (OLS) technique and the error–
correction model for long-run and short-run impacts; (4) the vector error–correction
model (VECM) with Granger causality method for causal link; and (5) innovative
accounting approach to study the robustness of causality analysis have been applied
to test the relationship among different variables (GDP, CO2 emissions, energy
consumption, financial sector development, and trade openness).
Omri, Daly, Rault, and Chaibi (2015) mention that in the environmental Kuznets
curve (EKC) literature, as output increases, carbon dioxide emissions increase as
well until some threshold level of output was reached after which these emissions
begin to decline.
Greece is a country of utmost importance in the energy area, due to the
commitment of the Greek government to transition towards renewable and cleaner
ways of energy. So, it is critical to analyze this sensitive sector and identify if there is
space for reduction of emissions with the use of the abovementioned technologies.
The rest of this chapter is organized as follows. Section 2 depicts the most
recent literature, while Sect. 3 describes the data and methodology, where Sect. 4
discusses the empirical results. Section 5 concludes the work and proposes further
implementations.
2 Literature Review
As pointed in the introduction part there are many studies that focus on environmen-
tal and energy topics.
CO2 Emissions, Energy Consumption, Economic Growth, Trade. . . 381
To begin with, many studies test the existence of environmental Kuznet’s curve
(EKC) (Fodha & Zaghdoud, 2010; Saboori et al., 2012). The results of these studies
are controversial and in many cases researchers fail to establish the inverted U
relationship with the real-life data (He & Richard, 2010; Lean & Smyth, 2010;
Tamazian & Rao, 2010).
There are other studies that try to implement a causal relationship between energy
consumption and output growth. Here also the results are quite different. Some
studies found no causality between energy consumption and output growth (Cheng
& Lai, 1995; Stern, 1993). Some studies found two-way causality (Asafu-Adjaye,
2000; Glasure, 2002), while others found unidirectional causation from output to
energy consumption (Narayan & Smyth, 2008; Soytas & Sari, 2003).
Moreover, some studies examine the relationship between economic growth
(as expressed from GDP per capita) and energy consumption by using data from
different countries (Dogan, 2014; Shahbaz et al., 2015; Smyth & Narayan, 2015).
Another critical and examined variable is trade openness (Ang, 2009; Jayan-
thakumaran, Verma, & Liu, 2012). Except for trade, some researchers include in
their studies in the EKC model one more variable which is urbanization (Hossain,
2011; Kasman & Duman, 2015; Sharma, 2011). According to Dogan and Turkekul
(2016), at the most basic interpretation, the increase in urban population results in
higher industrial output, transportation, and energy consumption and gas emissions.
In some studies, a newly introduced variable is financial development. According
to Dogan and Turkekul (2016), financial development may lead to lower financing
costs and better and larger financing networks through which enterprises can have
higher opportunity to make more investment and buy new machines and equipment,
resulting in more energy consumption and CO2 emissions. The use of this variable
can be also found in the following studies (Aslan, Apergis, & Topcu, 2014;
Sadorsky, 2010; Tang & Tan, 2014).
A recent paper by Omri et al. (2015), reviews the literature under three subsec-
tions, e.g., (a) economic growth and CO2 emissions; (b) financial development and
CO2 emissions; and (c) trade openness and financial development.
Before the end of this section, we analyze three recent papers, published between
2017 and 2019 which depict the most recent trends in the examined area.
Ouyang and Lin (2017) conduct a comparative study between China and Japan
at the urbanization stages to analyze the similarities as well as differences of
influencing factors of CO2 emissions. Their results indicate that although CO2
emissions in Japan and China showed similar characteristics of rigid growth
during the urbanization processes, significant differences exist in factors such as
CO2 emissions per capita, energy structure, and energy intensity between the two
countries, which are the determinants for CO2 emissions growth.
Wang, Li, and Fang (2018) empirically explore the link between urbanization,
economic development, energy consumption, and CO2 emissions, specifically
taking into account the different income levels of the countries studied. A series
of panel data models and a balanced dataset for a panel of 170 countries were
utilized in the study, for a period of 30 years. The result of panel cointegration
tests suggested that a cointegration relationship existed between variables in all
the countries studied and that a statistically significant positive relationship existed
between the variables employed in the long run.
Mardani, Streimikiene, Cavallaro, Loganathan, and Khoshnoudi (2019) present a
comprehensive overview of the relationship between CO2 emissions and economic
growth. A review of 175 published articles appearing in 55 scholarly international
journals between 1995 and 2017 has been achieved to reach a broad review of the
nexus between economic growth and CO2 emissions with other indicators. The
results of this chapter demonstrated that the nexus between CO2 emissions and
economic growth gives reasons for policy options that have to reduce emissions
by imposing limiting factors on economic growth as well.
3.1 Data
The variables used in this study are CO2 emissions (CO2 ) (per capita carbon dioxide
emissions in metric tons), gross domestic product (GDP) (per capita in constant
2010 US dollars), energy consumption (EC) (Kg of oil equivalent per capita),
trade openness (TO) (exports plus imports as a share of GDP), and urbanization
(UR) (share of urban population). The data employed for this research are annual
and cover the period from 2000 to 2017. All variables come from the World
Development Indicators (2020) and the World Data Atlas (2020). The descriptive
statistics of the variables are illustrated in Table 1.
Table 1 Descriptive statistics

CO2 EC GDP TO UR
Mean 7.801705 2487.117 21,716.27 56.96658 75.71283
Median 8.378163 2542.376 21,914.96 57.68450 75.75000
Maximum 8.980839 2753.051 31,997.28 67.14945 78.72400
Minimum 6.100000 2123.898 12,042.95 47.74385 72.71600
Std. dev. 1.102130 237.4680 5714.679 6.226427 1.929861
Skewness −0.442687 −0.438390 −0.020807 0.073922 −0.031922
Kurtosis 1.512479 1.692972 2.257029 1.841495 1.763010
Jarque-Bera 2.247454 1.857800 0.415303 1.022993 1.150664
Probability 0.325066 0.394988 0.812490 0.599598 0.562518
Sum 140.4307 44,768.11 390,892.8 1025.399 1362.831
Sum sq. dev. 20.64974 958,648.2 5.55E + 08 659.0628 63.31417
Observations 18 18 18 18 18
3.2 Econometric Methodology
In order to analyze the relationship between carbon dioxide emissions, national

income, and energy consumption we specify the model as shown below:
CO2t = a + β1 GDPt + β2 ECt + β3 TO + β4 UR + ε1t (1)
where:
CO2t = per capita CO2 emissions
GDPt = per capita real GDP
ECt = per capita energy consumption
TOt = trade openness
UR = share of urban population
εt = white noise
According to Kasman and Duman (2015), including the trade openness and the
share of the urban population in the model can be a solution for the problem of
omitted variable bias in the econometric estimation. This model is an extended
quadratic Environmental Kuznets Curve (EKC) model.
After the descriptive statistics for the variables examined, the study aims at the
following objectives:
• The first objective is to examine the stationarity of the variables.
• The second is to examine the long-run relationship between the examined
variables.
• The third is to estimate a dynamic vector error correction model (VECM) in order
to infer the causal relationships among the variables included in the model.
All data are expressed by logarithms in order to include the proliferative effect
of time series and are symbolized with the letter L preceding each variable name.
4 Empirical Results
4.1 Unit Root Analysis
We begin our analysis by checking the stationary properties of the variables included
in the study. We have applied the ADF test by Dickey and Fuller (1979) and the P-P
test by Phillips and Perron (1988). In all these tests, the null hypothesis is that the
variable contains a unit root.
The results of level and first difference unit root tests for the examined variables
are provided in Table 2.
The results in Table 2 reveal that all variables are nonstationary in their level data.
They become stationary in their first differences, and hence could be described as
integrated of order I(1).
Table 2 Unit root tests results

ADF P-P
Variable C C,T C C,T
LCO2 −2.84(0) −2.45(3) −0.34[1] −1.96[0]
LGDP LGDP2 −2.16(3) −1.26(0) −2.06[2] −1.25[5]
LEN 0.38(2) −2.45(3) −0.53[1] −2.09[0]
LTO −1.22(0) −2.01(0) −1.31[1] −1.21[1]
LUR −2.11(3) −3.32(2) −0.60[1] −1.33[1]
LCO2 −3.12(0)** −2.74(3)*** −3.11[1]** −2.87[1]*
LGDP LGDP2 −3.84(1)** −3.12(0)** −3.09[0]* −3.23[0]*
LEN −3.26(0)** −2.96(3)** −3.26[0]** −3.12[0]**
LTO −3.65(0)** −3.71(0)*** −3.939[9]* −4.26[8]**
LUR −3.95(3)** −153.24(0)* −5.25[2]* −113.56[2]*
*, **, and *** show significance at 1%, 5%, and 10% levels, respectively. The numbers within
parentheses followed by ADF statistics represent the lag length of the dependent variable used
to obtain white noise residuals. The lag lengths for ADF equation were selected using SIC.
Mackinnon et al. 1999 critical value for rejection of hypothesis of unit root applied. The numbers
within brackets followed by PP statistics represent the bandwidth selected based on the Newey and
West (1994) method using Bartlett Kernel. C Constant, T Trend
Table 3 Johansen cointegration test results

Statistics 5% critical values
Null hypothesis Trace Max Eigen Trace Max Eigen
CO2 , GDP, EC, TO, UR (k = 5)
r=0 290.3824 173.0089 69.81889 33.87687
r≤1 117.3735 75.19043 47.85613 27.58434
r≤2 42.18307 22.71974 29.79707 21.13162
r≤3 19.46333 15.26314 15.49471 14.26460
r≤4 3.200191 3.200191 3.841466 3.841466
Critical values derived from Osterwald–Lenum (1992), r denotes the number of cointegrated
vectors, Akaike criterion is used for the order of VAR model
4.2 Cointegration Analysis
After testing the stationarity of the series, we apply the Johansen (1988) and
Johansen and Juselius (1990) Full Information Maximum Likelihood (ML)
approach to investigate whether there is long-run relationship between CO2
emissions, energy consumption, urbanization, trade openness, and economic growth
for the Greek economy. Akaike Information Criterion (AIC) (1974) was used
to determine the optimum lag length selection. Table 3 presents the results of
cointegration analysis.
Empirical results from Table 3 show that both methods of cointegration test
support the presence of a cointegrated relationship between the variables. The
maximum eigenvalue and trace tests statistics have their values greater than the
critical values at 5% level of significance. Therefore, the null hypotheses of no

cointegrating vectors (r = 0; r ≤ 1, r ≤ 2, r ≤ 3) against the specific alternatives are
clearly rejected.
So, we conclude that there is a long-run equilibrium relationship among exam-
ined variables meaning that energy consumption, economic growth, CO2 emissions,
trade openness, and urbanization are moving together in the long run. The long-run
equilibrium relationship is shown in (2):
CO2t = 9.298 + 0.038GDPt + 0.377ENt + 0.100TOt + 0.152URt (2)
4.3 Granger Causality Analysis Based on VECM
After determining that the logarithms of the model are cointegrated, we examine
the direction of causality using the Engle and Granger (1987) approach. According
to Engle and Granger (1987), if there exists a long-run relationship between the
variables, causality relationship must exist in at least one direction.
The direction of causality can be detected through the Vector Error Correction
model (VECM) of long-run cointegrating vectors. Thus, in the first step, we find out
the long-run equilibrium relationship from (1) and save the residuals corresponding
to the deviation from equilibrium point. The second step estimates the parameters
related to the short-run adjustment.
The equations which arise are used for the Granger causality test and are the
following:

p
p
p
ΔLCO2t = α1 + β1i ΔLCO2t−i + γ1i ΔLGDPt−i + δ1i ΔLECt−i
i=1 i=1 i=1

p
p
+ ε1i ΔLTOt−i + ζ1i ΔLURt−i + λ1 ECMt−1 + u1t
i=1 i=1
(3)

p
p
p
ΔLGDPt = α2 + β2i ΔLCO2t−i + γ2i ΔLGDPt−i + δ2i ΔLECt−i
i=1 i=1 i=1

p
p
i=1 i=1
(4)

p
p
p
ΔLECt = α3 + β3i ΔLCO2t−i + γ3i ΔLGDPt−i + δ3i ΔLECt−i
i=1 i=1 i=1

p
p
i=1 i=1
(5)
Table 4 Multivariate Granger causality test based on VECM

Short-run (F-stat) Long-run (t-stat)
Dependent variable LCO2t LGDPt LENt LTOt LURt ECMt−1
LCO2t 5.21* 0.39 5.32* 0.98*** 4.32*
LGDPt 5.63* 1.34 1.40 1.82 −4.22*
LENt 0.10 1.44 0.00 0.50 −0.43
LTOt 3.56*** 0.03 4.00*** 1.48 −1.86***
LURt 0.24 4.66*** 0.15 1.18 −0.77
*, **, and *** show significance at 1%, 5%, and 10% levels, respectively; first difference
operator

p
p
p
ΔLTOt = α4 + β4i ΔLCO2t−i + γ4i ΔLGDPt−i + δ4i ΔLECt−i
i=1 i=1 i=1

p
p
i=1 i=1
(6)

p
p
p
ΔLURt = α5 + β5i ΔLCO2t−i + γ5i ΔLGDPt−i + δ5i ΔLECt−i
i=1 i=1 i=1

p
p
i=1 i=1
(7)
where denotes first differences, L that the variables are expressed in logarithms,
i (i = 1, . . . p) is the optimal lag length determined by the Akaike information
criterion (AIC), ECMt−1 stands for the lagged error correction term from the long-
run cointegration equation (1), λ1 , λ2 , λ3 , λ4 , λ5 are the adjustment coefficients, and
u1t , u2t , u3t , u4t , u5t are the disturbance terms assumed to be uncorrelated with zero
means N(0,σ ).
The results of Table 4 show that, in the long run, there are bidirectional
causal relationships between economic growth and CO2 emissions, as well as
between CO2 emissions and trade. In addition, the results provide evidence of
unidirectional causalities running from energy consumption to trade openness and
from urbanization to CO2 emissions, respectively. Furthermore, as reported in Table
4, there is a short run unidirectional causal relationship between economic growth
and urbanization, with direction from economic growth and urbanization.
5 Conclusion
The aim of this chapter is to examine the relationship between energy consumption,
carbon dioxide (CO2 ) emissions, urbanization, trade, and economic growth for
Greece, in the environmental Kuznets curve (EKC) model covering the period
2000–2017. The long-run results confirm bidirectional causal relationships between
economic growth and CO2 emissions, as well as between CO2 emissions and
trade openness. Also, the results of Granger causality present a unidirectional
relationship running from energy consumption to trade and from urbanization to
CO2 emissions. In the short run, the results reveal that there is a causal relationship
between economic growth and urbanization, with direction from economic growth
and urbanization.
According to current conditions, there is an urgent need to plan renewable
energy (RE) technologies which fight against future challenges. Greece is in a
transitional position, trying to move to cleaner and renewable energy technologies.
Policymakers should develop comprehensive and conversation energy policies to
achieve long term sustainability. According to Bekhet et al. (2017), this could
become possible with the study of the relationship and causality among economic
growth, financial development, CO2 emissions, and energy consumption in one
framework. On the other hand, the attitudes and reactions of local communities
towards renewable energy should be taken into consideration in order to eliminate
adjusting to these new technologies (Paravantis et al., 2018).
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Does the Time-Driven ABC Method
Apply in a Construction Company
N. Kartalis, Ath Patsios, I. Velentzas, G. Broni, G. Charitoudi, G. Panoy,

and G. Kiriakoylis
Abstract This chapter explores the role of ABC’s business and service busi-
ness activities, citing the basic principles and structure of their costing, based
on TDABC’s time activity. The aim of the TDABC selection is to reduce the
complexity of calculating and allocating costs, which characterizes ABC systems,
which are used by large companies. The new version of ABC is presented in the
service sector.
This chapter is based not only on theoretical and applying methods but also
on new versions of ABC. The research that follows in the last part is the basis
of the synthetic description of ABC and Time-Driven ABC methodologies, where
an example is given, which shows the calculation of costs from service activities,
using the TDABC method. The role of time equations in TDABC is explained as
an illustrative example for those interested in accounting services to businesses, as
exemplified by previous research, and also highlights the strengths and weaknesses
of the new expenditure formula, based on the company’s activities.
Keywords Management accounting · Activity-based costing · Time-driven

activity-based costing
1 Introduction
The concept of Activity-based costing (ABC) is that it is focused on theoretical and

professional accounting management interest, from the very first publications on
N. Kartalis () · I. Velentzas · G. Broni · G. Charitoudi · G. Panoy · G. Kiriakoylis

Department of International and European Economic Studies, University of Western Macedonia,
Kozani, Greece
e-mail: nkartalis@uowm.gr; ivelentzas@uowm.gr; gbroni@uowm.gr; Charitgeo@uowm.gr
A. Patsios
University of Western Macedonia, Kozani, Greece
e-mail: ies11124@uom.edu.gr
https://doi.org/10.1007/978-3-030-63970-9_27
392 N. Kartalis et al.
the nature and structure of ABC conducted by the American professors Cooper
and Kaplan (1988, 1991, 1992). Costing systems based on this idea provide
relevant information in the context of a long-term business management strategy.
Expenditure based on the activities that reflect the business process is not only a
method of accurately calculating the cost of the company’s products and related
business, such as customers, but also a system for calculating normal and realistic
costs. In this way, it is possible to effectively manage resources, activities, and
processes. It is, therefore, a costing system that can be used effectively with other
advanced management accounting tools, such as Balanced Scorecard.
Costing based on ABC activities comes from US construction companies, but it
soon proved to be useful to service providers. Service companies have the operating
costs set at the time the resource supply is committed, so they need to be costed
by ABC more than any other construction company. ABC systems provide service
providers with information on costing process and the efficiency of their services,
customers, and markets. Of course, large companies that use this method tend to
be rather complex and their information to be quite expensive and time-consuming.
This is, after all, the main reason for dissatisfaction with the implementation of the
ABC system, which has forced many companies to abandon the use of this costing
system after its implementation (Szychta, 2010).
The ABC system, therefore, has received negative reviews. In response to this
criticism, Kaplan and Anderson (2004, 2007) proposed the new version of ABC,
called Time-Driven Activity-Based Costing (TDABC). This is a variant of the
ABC system, which aims at this new system or the new version of the same
system is to reduce the complexity of costing in terms of calculation and costing
process. TDABC makes it possible to eliminate the problems arising from the
implementation and operation of conventional ABC systems in large and very large
companies as well as in service providers.
Kartalis and Matis (2015) apply this method in a branch of the Hellenic Post
Office. The results show that the information about the cost that is been assigned
by the activities which use the company’s resources, which in our case are the
employees, and furthermore they discover the amount of capacity that is been used
properly by these resources.
According to Kaplan and Anderson (2007), by 2006 TDABC had been imple-
mented in 200 companies Recent publications have focused on whether TDABC is a
new method of accounting costing or an old system in a new version (Dlubak, 2005;
Gervais, 2009). The issue of the characteristics, advantages, and disadvantages
of TDABC (Przytula, 2005; Szychta, 2008), whether it is an underlying model
(Bruggeman & Everaert, 2007), the dynamics of its usefulness (Coners & von der
Hardt, 2004) was also investigated, (2004) and the role of equation time and the
factors that can lead to costing errors, as one applies this new version (Cardinaels
& Labro, 2008). Few studies have dealt with the actual applications of TDABC to
specific companies (Gervais, 2009; McDonach & Mattimore, 2008).
In short, costing according to TDABC has been at the center of discussions
since the mid-2000s and is a key development in accounting process costing and
costing based on ABC activities. TDABC was developed by Kaplan and Anderson
Does the Time-Driven ABC Method Apply in a Construction Company 393
(2005), although the initial approach to ABC is already found in the books and
studies of Kaplan and Cooper (1998). Recent improvements to TDABC can also be
used in accounting for the costing process. The basic idea of accounting costing,
with the aim of distributing overheads based on the use of business processes, is
unchanged. The costs of the procedure are determined, in the context of the TDABC
method, based on the time, i.e., based on the time it takes to carry out the process of
determining the level of the corresponding cost.
Therefore, based on the above features of the costing process, the issue of the
TDABC method is studied, as it can be applied in the field of accounting, giving
significant advantages and being a process that is worth applying in this area for
business costing. In order to inform and encourage the use of this method, therefore,
this work was structured.
2 Costing and Accounting
Accounting as a science that deals with the provision of information on business

financial data. The information obtained divides the accounting based on who is
the recipient of the financial information in financial accounting and management
accounting. Financial accounting refers to the information of stakeholders who are
not involved in the operation of the business but interact with it or intend to interact.
Such external stakeholders can be the state (it is interested in imposing its taxes),
creditors (they are interested in securing the repayment of loans), future investors,
and shareholders. In contrast, management accounting refers to information, in
order to make decisions about the best functioning of the business and is addressed
mainly within it (executives, managers) (North, 1992).
One of the main functions of management accounting is cost management
(costing). With costing, companies try to manage (through the mapping of the costs,
their analysis, and ultimately decision-making) in the best possible way the costs
of utilizing the inflows (productive factors). After the implementation of costing,
companies can plan and plan their future plans (draft budgets-forecasts), evaluate the
performance of their resources, and invoice their products-services (North, 1992).
The purpose of costing is to enable businesses to achieve economies of scale,
i.e., to reduce resource costs (the cost of resources applies to all other costs such
as administration or advertising costs and not just the production process) with
increasing increase production so that increasing profits are made and their goals
achieved. The great importance of business costing has led to the finding of different
cost calculation methods, to the development of new costing information systems
(Enterprise Resource Planning—Management Information Systems), which in turn
led to the individualization of costing each business on its own unique characteris-
tics, as well as the search for specialized executives in order to select and implement
the various costing methods and parameterization in the unique characteristics of
each business to make better decisions (North, 1992).
2.1 The Cost Definition
The term “opportunity cost”, according to Balla, Heva, and Vlisma (2014), the
Anglo-Saxon more generalized concept of cost definition that covers all uses is
the following: “cost is considered the monetary value of resources allocated for
a purpose”. The Greek academic bibliography accepts the definition of Tsimaras
(1995), according to which the cost is: “the set of all kinds and forms of financial
sacrifices required to produce a product or service under given technical and
economic conditions each time and take a certain form or properties as well as place
in space and time.”
From the above definitions the conclusions through which certain common
features emerge that in turn contribute to the understanding of the concept of cost
are the following:
(a) cost is a sacrifice (even in the second looser definition it is obvious that
sacrificing money is cost),
(b) the sacrifice aims at the enjoyment of some benefit, first we make the sacrifice
and then (at a later time) we aim at the enjoyment-creation of benefit,
(c) with regard to the last two definitions, the sacrifice results in the acquisition or
creation of an asset, so we have the sacrifice of an asset that is sacrificed for its
conversion into another asset (Tsaklaganos, 2000).
There is often confusion when costs are often equated with costs and expenses.
Costs, according to Kartalis (2017), are costs that are eliminated in order to create
benefits in the current accounting year, so they are deducted from the income
and affect the Consumption Results, just as the accounting authority protects the
revenue-expenditure correlation (Use Results = Revenue-Expenses). The expense
is preexisting as a cost, while the opposite does not happen (e.g., A C 7000 was used
from reserves worth A C 10,000, so the costs are: AC 7000). On the other hand, the cost
is related to the terms costs and expenses as it is the energy of their realization (e.g.,
I spend to buy a new machine).
3 Methodology
It is a fact that knowledge of this innovative costing accounting system is extremely

limited, and this raises the need for discussion on the subject, considering its
contribution. The purpose of this chapter is to explain the essence of the TDABC
principles compared to other systems, but also its features, aspects of this system,
and then to prove how useful a method it is for customer service. Also, individual
objectives are to explore the main reasons and purposes of using the TDABC system,
how to simplify cost calculation, and how to construct time equations and the role of
these equations in calculating the cost of various businesses of each activity and each
body service provider. For this purpose, the use of an example, for understanding,
was chosen as an indicative example of documenting and highlighting these issues,

as research has been presented in previous research.
Case Study is an effective method, e.g., which can be investigated and understood
complex problems in real space. It is a research methodology, used by a variety of
disciplines and mainly by the social sciences, education, business, health, and law.
The aim is to cover research issues with its use. Therefore, in the last 40 years,
by applying various methodological approaches, the case study has developed
significantly. Change and progress are the results of many influences from historical
research approaches and from the preferences, perspectives, and interpretations
of case studies. The key element of these alternative research approaches is the
supportive ontological and epistemological orientations of the individuals involved
in the development of the case study. Researchers who have also contributed to the
development of the case study are from various disciplines, with the philosophical
underpinnings being the result of various and varied approaches. Therefore, various
plans have been proposed to prepare, design, and conduct a case study to ultimately
be successful. Thus, while the case study has evolved to look real, on the other
hand, the flexible research approach, the differentiation in terms of its clarity, the
application, the validity, and the expediency push on a counterfeit platform in its
use (Harrison, Birks, Franklin, & Mills, 2017).
There are many definitions for case study in the literature and this is confusing
as one tries to understand the meaning of case study. The most common definitions
are derived from the work of Yin (2014), the Stake (1995), and Merriam (2009).
According to Yin (2014), more emphasis is placed on the scope, process, and
methodological features of the case study, emphasizing the nature of the research
as empirical and its significance for the case.
In addition Yin (2014) stated that the case study is a form of social science. These
philosophical tendencies are also evident in the way he defines case study as a form
of empirical research. According to Yin, there is a realistic perspective, where he
focuses on maintaining objectivity in methodological processes, in the context of
research design.
According to post-cultural qualitative researchers, research embraces the ideals
of objectivity and generalization of research results (Ellingson, 2011). The goal
of any post-civilization researcher is to use science as a means of understanding
the nature of reality, while understanding that any measurement is imperfect. It,
therefore, focuses on the use of multiple methods through triangulation, to bypass
the errors and understand what really exists by approaching the truth (Lincoln,
Lynham, & Guba, 2011). The researcher, therefore, classifies the qualitative data
to create quantitative data, which he will then analyze, using statistical methods.
The validity of the research results is verified by examining other similar cases, so it
is very important to follow those mechanisms that ensure the rigor in data collection
and analysis. Furthermore, post-cultural researchers acknowledge that everyone is
inherently biased in worldviews, which have a significant impact on the use of
heresy methods. Therefore, the interaction with research issues should be limited
and subjectivity should be avoided, as it discourages the final research results.
Yin (2014) also mentioned the features of the case study. Here, too, he was
influenced by the post-cultural approach. In particular, it focuses on the search for
competitive explanations and falsifies assumptions, stating that this research enables
copying by designing multiple case studies. Although objectivity is targeted, Yin
recognizes the descriptive and interpretive elements of the case study. According to
Yin (2014), then, what sets the case study apart from any other type of experimental
research is that the case study is investigated in the context in which the real
environment is examined. The choice of cases is based on the purpose of the
research and is related to the theoretical proposals regarding the topic of interest
to the researcher. He, therefore, suggested careful selection in the selection of cases,
in order to ensure the specific relevance to the issues of interest and the use of logical
copying.
The cases to be investigated, therefore, should be selected in order to produce
expected opposite findings (theoretical reprint) or similar findings (literal reprint).
Accuracy, process, and practicality are the main elements of Yin’s approach to the
case study. The design elements are structured and stimulated sequentially during
the empirical application. This position reflects the evaluation of the post-cultural
feature, where spiritual honesty is maintained, the management of bias and the
recognition of limitations, combined with careful data collection and accuracy in
reporting critical data when conducting research (Killam, 2013; Yin, 2014).
4 Research Analysis
In our research, we apply personal observation and interviews from the managers
and from supervisors of the construction company Omega, and we managed to trace
the basic activities. After 1½ month of observation, we measured the time of each
activity to lead us to the creation of the necessary time equations and also calculated
the practical capacity which it will lead us also to the final results regarding cost and
how much the resources which are assigned with cost are been used.
In addition, we analyze certain cost centers, using the cost accounting system
TDABC. The aim was to assess the effect of TDABC and compare it with traditional
ABC, so that in a technical company the two cost centers are the processing
of orders made from within (e.g., domestic) and the provision of technical and
mechanical services we will consider the cost center for processing orders from
within and in which costs are channeled from two departments, the customer service
department and the accounting department (this department includes an external
partner who is an accountant). Therefore, the processing of orders/transactions from
within consists of:
– Support costs: salaries, office space, etc.
– The two departments of OMEGA: Accounting and Customer Service
OMEGA has identified three monitoring activities of the order

1. Registration and Processing of orders
2. Create a priority list
3. Invoice management and payment processing
At this point, there is the most important difference in TDABC methodology with
traditional ABC as the traditional method system at its initial stage uses recognize
only one activity for the cost guide which in our case is the number of orders
(the cost guide refers to the activity: registration and processing of orders). A key
assumption of the traditional ABC system is a cost driver corresponding to an
activity or due to the large number of activities a cost tank for related activities
can be created (adding up the cost data of similar activities). This will correspond
to a cost guide in a tank, which means that for each activity we must calculate the
index-factor of each cost driver that concerns it.
Therefore, the costs from the cost processing center of order processing are
distributed to the cost data (family of services-products of domestic orders and
customers who place orders in-house) by channeling the costs from a single
cost tank. Recognizing a single cost driver (number of orders) in the cost center
(processing domestic orders) and applying this guide to support costs (salaries,
office space, etc.) calculates the average cost for the activity involved (ordering and
processing orders). Thus, the traditional ABC costing system assumes that each
order is the same and does not offer the possibility of calculating cost differences
that may arise due to the specificity that an order may have, e.g., (different payment
methods, personalized customer service (receipt by space, special orders)).
To use a single driving model in traditional ABC, we need to calculate the
average cost per driver of activity. Within the cost center, the cost of a “number of
orders” driver requires that the order be the same and does not allow the recording
of possible cost differences that may arise from one order to another, contrary to
the TDABC method of time factor guidance (time equations: see below) allow you
to calculate the driver’s cost changes (e.g., orders via the web at a lower cost than
orders over the phone).
For the implementation of the TDABC system, a specific procedure of the
following two stages was followed:
A) Step/Stage 1. Calculation of capacity cost for the cost center
Capacity cost for central cost is defined as the cost of resource capacity-
capacity to produce for the business (A C) divided by the practical capacity
of the resources provided, expressed in units of time, i.e., in minutes. The
calculator in this calculation is at employee cost, utility services, machines,
occupancy costs, and more. The management estimates that the cost of provided
capacity resources for the center is A
C 6.624 per quarter. The denominator in
the calculation is the time available for the employment of employees in the
cost center. The total available capacity-capacity in minutes per employee, per
Table 1 Processing of internal orders: Capacity/cost capacity index of OMEGA

Number of employees: 3 % of employment time Skill
Customer service officer (full-time): 31% 9068
Director of internal accounting 3% 878
(full-time):
External accountant (part-time 100% 1800
external collaborator):
Practical ability of provided sources: 11,745 min
Cost of capacity provided: A
C 6624.00A
C 0.56
Cost capability/capacity index
(per minute):
Cost Indicator/Capacity Index = the cost of the capacity of the resources (in euro)/practical ability
of the resources provided (minutes)
a This indicator gives us the cost of resources related to the cost center, e.g., the processing of
internal orders—in units of time (minutes, hours, etc.)
quarter, in Omega, assuming that one working week is 37.5 h, i.e., 29,250 min.1
As can be seen from Table 1, the practical capacity of the available resources
(per quarter per minute) is 11,745 which results from whether as shown in
Table 1 and is found if we multiply the percentage of two full-time employees
in the cost center processing domestic orders (3% and 31%) with the total
available minutes of capacity of the employees and add the minutes of the
external accountant who we calculated works for the company and specifically
in the accounting department and spends 100% of his working time in the cost
center, [(3% × 29.250 = 87 8 min) ± (31% × 29.250 = 9.06 8 l seven) ± 1.80
0 min] = 11.74 5 min. Therefore, the ratio of the cost for capacity cost center
processing orders, under TDABC, was A C 0.56 per minute (A C 6.624 ÷ 11 . 745
min).
B) Step/stage 2: Assessment of the capacity-capacity demand of the resources of
the activities related to the cost center. Processing of internal orders based on
time (development of time equations)
This stepinvolves calculating the time it takes for each of the three activities
to be performed at central cost. Orders are imported and monitored, priority lists
are created, and invoices and payment plans are managed.2 OMEGA provided
information on identifying and understanding buyers’ behaviors for each of the
three activities that require time and that can vary by activity. Then, the equation
1 The total of 29,250 min results from the first determination of the number of weeks per quarter
(52/4 = 13 weeks) and then by 13 weeks by 37.5 (number of working hours per employee per
week, assuming two 15 min with pay breaks per day). This provides the total number of hours
worked per quarter 487.5 op the U the proliferation of 487, 5 h with the 60 min to convert hours to
minutes gives 29,250 min per quarter per full-time employee.
2 OMEGA management provides an overall estimate 9 min to be performed and the third in
activities s with respect to a request or transaction. The estimate does not provide for any change
in the ordering process. In addition, the number of orders per quarter.
of time per activity in the central cost was obtained and an estimate of the time
(in minutes) was used to represent the demand for resources per variation of the
transaction. The time equation per activity is as follows:
• Import and follow orders, per order (minutes) = [2.00 (per Web order), or
3.50 (per telephone order), or 4.00 (per order visit)] + [1.00 (if advice is
provided)] + [0.50 (if change of address is required)] + [0.50 (if desired)
warranty],
• Create priority list per list (in minutes) = 2.00 (per domestic order), 1.50 (per
order installation)
• Invoice management and payment processing per invoice (in minutes)
1.50 + [0.75 (per payment by debit-credit card) + 3.00 (per payment in
cash) + 0.75 (per payment via PayPal)].
As it turns out, the time spent resources in central cost ranges from 5.75 to 12.50
cents per transaction, depending on the characteristics of the transaction. From the
multiplication of the cost/capacity index for the cost center of the Internal Order
Processing activity (A C 0.56/min) with the time equations per activity, it is estimated
that the cost attributed to a single transaction ranges from A C 3.22–A C 7. As shown in
Table 2, here, the cost-time guide of the activity is calculated on the basis of time,
which compared to the guide number of orders that gives us the cost per order of A C
7, during the measurement based on the traditional ABC, the additional information
is highlighted. offered by the TDABC system (Tables 2, 3, and 4).
OMEGA executives can use customer order cost data to conduct a detailed
analysis of customer and product/service profits. For example, when determining
customer profitability, it can be clearly seen that it costs much less to order a product
over the web and pay via PayPal than to order by phone and pay by cash/check.
In addition, the company’s management may conclude that for the examined
quarter the AC 3844.96 of the cost support cost of the cost center was used-consumed,
while the cost of the resources offered was A C 6624. The fact that the cost of the
center was not distributed in full gives us the information that the cost center works
below its capacity.
In the case of OMEGA, the original model of the traditional ABC system
was applied (the aim was to emphasize the difference between the two costing
systems TDABC and ABC). A better OMEGA costing system could be designed
for ABC (e.g., to determine the most appropriate cost driver, to use the practical
capacity/capacity to determine the cost of activity, to create a tank for some common
cost elements).
Thus, the traditional ABC method could also detect the difference between the
potential and cost-effective consumption of the center. However, traditional ABC
usually estimates the cost of resources more because of the research required by the
method in terms of the time it takes for employees to be employed in an activity
(employees often calculate the lost capacity-cost capacity to produce).
In contrast, TDABC gives an accurate picture of how resources are used in
relation to their usability. Since the calculation of the relationship per unit time is
not left to the research and calculation by employees.
Table 2 Application model TDABC in OMEGA in cost center

Time-based Quantities of Time per Total Cost guide Totally
activities in orders/ order/extra time indicator distributed
minutes transactions time costs
Time per order
Quantity × cost
Registration Quantities of × time capability Quantity
and ordering quarter In minutes per order index (0.56) ×driver index
Per Web order 600 2.00 1200 A
C 1.12 A
C 672.00
Per phone 300 3.50 1050 A
C 1.96 A
C 588.00
order
Per order by 46 4.00 184 A
C 2.24 A
C 103.04
visit
If advice is 500 0.50 250 A
C 0.28 A
C 140.00
provided
If a change of 200 0.50 100 A
C 0.28 A
C 56.00
address is
required
If he wishes a 700 1.00 700 A
C 0.56 A
C 392.00
guarantee
Create a
priority list by
list
Per domestic 500 2.00 1000 1.12 A
C 560.00
order
Per order 100 1.50 150 0.84 A
C 84.00
installation
Invoice
management
and payment
processing per
invoice
Per payment by 946 1.50 1419 0.84 A
C 794.64
debit-credit
card
Per cash 700 0.75 525 0.42 A
C 294.00
payment
per payment 200 0.75 150 0.42 A
C 84.00
via PayPal
Per payment by 46 3.00 138 1.68 A
C 77.28
check
Edit internal orders and comparison with the ABC
Internal order processing activities Time-Driven Activity-Based Costing
Source: Stout and Propri (2011)
Table 3 Processing of internal orders activity-based costing

Cost guide Totally
% employment Ability/capacity’s (number of Cost guide distributed
Activity time costs orders) indicator costs
Import and 100 A
C 6624.00 946 A
C 7.00 A
C 6624.00
follow
orders
Create a – – – – –
priority list
Invoice – – – – –
manage-
ment and
payment
processing
Total – – – – A
C 6624.00
Source: Stout and Propri (2011)
a The amount of the cost guide indicator is found by dividing the cost capability by the number
of orders (cost guide in the ABC model): 6624/946 = 70,021 to A C ~ 7.00 A

C
b The total allocated costs are equal to the ability/capacity after cost model based on the ABC
costing system we believe that all costs relating to the activity center distributed import and
tracking orders
Table 4 Totally distributed costs

Totally distributed ABC costs Totally distributed TDABC costs
A
C 6624.00 A
C 3844.96
THE COST CENTER OPENS UP THE THE COST CENTER OPENS UP THE
POSSIBLE COSTS (IN EURO) Total distributed POSSIBLE COSTS (IN TIME)
ABC costs − Totally distributed TDABC costs (A
C Practical Capacity of Resources (in
6624.00 − A C 3844.96 = AC 2779.04) minutes) − Total Time of TDABC
(11,745 − 6866 = 4879 min)
5 Conclusion
According to Kaplan and Anderson (2004), managers can easily update over time,
based on the ABC model, in the event of changes in the operating conditions of the
business, such as an increase in the number of activities. It is also easy to find out
the percentage of an activity cost driver. Changes in the cost of driver cost are the
result of two factors: changes in the prices (wages) of the resources provided, which
affect the unit cost of the practical capacity of resources and change the efficiency of
the activity as a result of continuous improvement, redesign processes, application
of new technology or the process of performing the activity. Of course, the use of
TDABC is recommended, as it is a methodologically clearer costing method and
easy to implement and update, as it is a simple, elegant, and more accurate way
of costing based on the company’s activities. It is a way of costing, a faster and
more cost-effective way of delivering information about the cost of activities and
the efficiency of the business product (Kaplan & Anderson, 2004, 2007).
The analysis of the TDABC model, therefore, produces the following advan-
tages:
• Eliminates the difficulties of implementation and maintenance of the traditional
ABC costing model, especially in large entities such as the need to conduct
regular surveys to determine the distribution of working time between staff in
a variety of activities per department
• Assesses the practical capacity of the committed resources and their costs, where
no activities have been assigned and therefore to products, and is a separate
element that affects the economic result of a certain period of time
• Refers to standardized activities in the calculation of costs (phase of calculation
of practical time-consuming units of capacity) using time equations
It is easy to be informed to highlight changes in operation and operating
conditions, thanks to time equations. This can be considered a weakness for this
approach and the weakness lies in the fact that the calculations are mostly based on
the estimates made by the managers of the TDABC model. The results of activity
cost calculations can be wrong, as long as the estimates are too arbitrary and this
will lead to inaccurate information about the cost of the product and profitability.
In general, ABC is not universally considered to be an innovative solution. An
example is de La Villarmois and Levant (2007) who consider and argue that ways
to simplify cost calculations in the case of complex business producers in many
ways have been proposed in the literature. They also consider and claim that the
implementation of the ABC results in an incorrect evaluation of activity costs and
the use of working hours and this pushes into problems, as it is not an appropriate
measure, according to Kaplan, who criticizes traditional costing methods. This
objection is justified, as Kaplan and Anderson (2004, 2007) argue, as strict staffing
is not supported. Instead, it is recommended to use a capacity measure measure-
indicator, which best fits the type of activity performed in a given entity or process.
On the other hand, there are others who argue that the conventional basis of
costing an activity allows time to be used as a measure of activity. Kaplan and
Anderson (2007) explain, then, that the system ABC is costing different activity
than what the TDABC does. They themselves use the second costing method, i.e.,
after assigning the indirect costs to the activities, the cost drivers are calculated,
which are then used to distribute the cost of activities thus representing the cost of
the items.
Time-based measures (TDABC) ensure maximum accuracy in cost calculation
and are considered to be the most expensive process to achieve quantitative
measures. The TDABC, therefore, is used to measure discrimination capability and
processes and direct cost allocation of resources for products, which enables the
elimination of the stage of distribution of the cost of funding the activities. This
is possible because, due to the implementation of the fixed schedule for individual
activities, the data in the information system of this method is recorded.
There are those who raise their objections to the above. Thus, according to
Gervais (2009), the following views/positions are given:
• The issue of inactivity cost underlined the idea of TDABC is not a recent
discovery, but has emphasized literature from the early twentieth century and
today the idle capacity costs excluded from the cost of the product, as determined
for financial reporting purposes, according to International Financial Informatics
Standards on Accounting, in various countries
• There are issues with time calculation, especially in service delivery activities
in the TDABC model, as service times are irregular and volatile. The issue of
this measurement is strengthened as soon as one takes into account the stated
time. It may, therefore, cause distortion in cost calculations in the context of
using and applying TDABC. To successfully implement TDABC with timely
movement and efficient use of information by the system of this costing method
should be integrated into systems that provide data functions such as ERP and
CRM or obtain structured and standardized data from a database that is called
a data warehouse (Coners & von der Hardt, 2004). Therefore, the application
of TDABC to entities that do not have built-in information systems can be
problematic rather than sufficiently effective.
ABC systems, in general, are used by service providers to provide information
about the cost of their activities and services, to determine the profitability of
customers, customer groups, and the market. This information should provide
a basis for managing customer profitability. Of course, the application of the
conventional ABC model is mainly done in large constructions and it is often
proven that time-consuming and expensive procedures, so the use of ABC is often
abandoned.
The aim of the new version of ABC, i.e., TDABC, is to eliminate the problems
involved in large-scale ABC implementations, due to the variation in the way
of obtaining data on the time required to perform the activities and due to the
modification of the calculation of activity cost. The ABC type facilitates and speeds
up the calculation of customer activity, services, and costs in the service industries
and other types of businesses.
The TDABC, therefore, makes use of time basic primary cost driver for the
costing, i.e., time is used to immediately allocate the cost of the resources of the
objects, such as transactions, orders, finished products, services, and customers. This
makes it possible to omit a complex step involved in conventional ABC methods,
i.e., the cost of resources is assigned to activities before the cost allocation of the
items. The use of time, therefore, dominates as a measure of the operational capacity
of the processes and the duration of the activities in a company, where it makes
TDABC a suitable means of application to service providers. This is because the
services are measured based on the time used by the workforce to perform a given
activity.
A key feature of TDABC is also the time equations, as mentioned above, that
allows the variation in the demand for capacity resources in each variation of a given
activity time such as any type of activity that must be an additional linear equation
that includes the time required to perform a standard variation of an activity and by
increasing the time in each variation of that activity. Due to the TDABC application,
where time equations are used, the complexity of a given entity is more accurate and
is treated more simply than the classic ABC method.
According to Kaplan and Anderson (2007), there are more than 200 successful
TDABC applications. The new version of ABC is of course used with caution by
accountants and academics. This is because they need to be able to do a thorough
assessment of utility in practice, in which case it is necessary to test in a larger
number of companies. On the other hand, it cannot be overlooked that the TDABC
method, although an expensive costing method for business operations, nevertheless
enables value creation that far exceeds the cost of application and maintenance
due to the creation of useful information that guides decisions made by large
organizations with thousands of employees, with many departments and a huge
volume of products, processes, customers, and transactions.
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Economic Crisis Predictors Revisited
in Preparation for the COVID-19
Aftermath
Demosthenes Georgopoulos, Theodore Papadogonas, and George Sfakianakis
Abstract In this chapter we aim at revisiting the Economic crisis predictors

empirical literature by focusing on unemployment, adding new predictors, and
using novel analytical tools. More specifically, we use insights from the latest
(2008–2014) crisis in order to draw conclusions and, possibly, policy implications
about the imminent COVID-19 crisis. Using Panel Data for EU-28 countries, we
complement the list of “traditional” predictors (such as Public Debt, GDP per capita,
and Competitiveness) by adding an Inequality/Poverty index along with an Index to
represent how heavily regulated Product and Labor Markets are in various countries
(i.e., a proxy for the cumulative impact of implemented structural reforms). At the
same time, we place emphasis on taking into account the countercyclical economic
policy mix most countries (and Central Banks) opted to implement during the years
of the crisis. Inequality/poverty stands out as the most important predictor thus
validating previous findings. Relevant policy implications are drawn regarding a
potential policy agenda to alleviate the impact of the new crisis currently unfolding.
Keywords Economic crisis predictors · Inequality · COVID-19 · Panel data ·

Dominance analysis
The views expressed in this chapter do not necessarily reflect those of the Hellenic Ministry of
Development and Investments.
D. Georgopoulos
Hellenic Ministry of Development and Investments, Athens, Greece
T. Papadogonas · G. Sfakianakis ()
National and Kapodistrian University of Athens and Hellenic Open University, Athens, Greece
e-mail: gsfak@uoa.gr
https://doi.org/10.1007/978-3-030-63970-9_28
410 D. Georgopoulos et al.
1 Introduction: Motivation of the Research
In this chapter, we are entering into a “game” on “retrospective prognostics.” We

try to elaborate upon a scientific/educated guess about what sort of economic
and socioeconomic variables were best suited to predict the relative impact on
unemployment levels1 among European Union (EU) countries, some years in
advance of the “expanded” European Great Recession (2008–2014). In other words,
we try to find whether, standing at an ex ante privileged moment some years before
the crisis, we could make a knowledgeable prediction, about which EU countries
would be hit harder by unemployment during the crisis years.
We are confident that there are specific merits in undertaking such an inquiry. If
there are clear insights that some variables can act as predictors/leading indicators of
the actual unemployment outcomes some years later, then this methodology could
be used to “manipulate” the presumed predictive variables in order to change the
actual outcome. Thus, we could aim at a more favorable outcome in the labor
market, although we are not always certain about the exact causality, i.e., if specific
variables actually cause the observed outcome as a one-to-one relationship.2
Besides causality and the uncertainties stemming from it, there are more
justifiable questions to be asked: we suggested above that our outcomes can be
used to improve unemployment levels in the future—but, in fact, in what framework
can we launch such an endeavor? Are we allowed to speculate that socioeconomic
circumstances in the past (including several interacting/interconnected variables),
actually fit satisfactorily with different ones in the future—even if there were in
perfect harmony back then? What happens if things changed and, especially in
the case that they changed radically? In this case, is it straightforward to assume
that certain strong relationships between variables observed earlier (not necessarily
proven causally) can change the course of matters? What if past observed facts do
not apply anymore? These are reasonable doubts and we need to give some answers
before we proceed. As we mentioned above, things more often than not change
in human communities (and, therefore, in social sciences), but certainly there are
periods, usually not very prolonged, when the opposite seems true, i.e., when we
1 Among others, as an indicator of real economic activity.

2 We do not hesitate to acknowledge that such a prediction cannot act as documented causality, and,
thus, it might (although we support the opposite) work the other way, i.e., as a kind of spurious
causality. In this case, the manipulation of the “predictive” variables could be futile (best case
scenario) or even unproductive. However, we should note that this is not our best guess since
the choice of predictive variables is strongly supported by established theory further elaborated
upon during the crisis years. Furthermore, we also purport that the reverse causality is a rather
scarce outcome in social sciences, where the usual scientific methods of natural sciences are not
easy to replicate and, also, where even facts and their causal relationships are sometimes vague
and controversial coming from multiple directions, convergences, interconnections, and cross
fertilizations. In this case, if we are ready to accept the above observations as more or less valid,
we could tolerate our “not so exact” endeavor in this hard terrain of “retrospective prognostics” as
we referred to it earlier.
Economic Crisis Predictors Revisited in Preparation for the COVID-19 Aftermath 411
observe inertia rather than change—and we firmly believe that we stand at exactly
a historical point of this kind. After the recent Great Recession, governments of
developed countries at least, returned to the “business as usual” dogma, that is not
to change things but rather to pretend that nothing important happened during the
crisis years, so they could continue unhesitatingly on the same path. However, there
were (and are) increasingly more signs that such a policy stance is unproductive and
that we could end up in a new and, perhaps stronger, version of the preceding crisis.
As we all know by now, the coronavirus health crisis still unfolding is expected
to produce a strong depression, which many hope that, at least, will be temporary.
From our point of view, this is not necessarily so, as we firmly believe that COVID-
19 is not the real cause but rather the trigger for a deep crisis based on fundamentals.
Additionally, we base these thoughts on the crisis depth and duration of our findings
derived in this chapter.
Let us be more specific: in this chapter, we find that the stronger unemployment
predictor (and thus a crisis predictor), at least regarding the Great Recession,
was relative poverty3 which is, substantially, an inequality index strongly oriented
towards the lower socioeconomic stratum. The interpretation of this is that the
more unequal a country was (with emphasis on the poorer part of its population),
the higher was the unemployment level it faced. In Georgopoulos, Papadogonas,
and Sfakianakis (2012), the authors checked other inequality indices and found
them of lower importance, and as the relative poverty index retained its superior
predictive power, we decided to keep it and check the validity of previous results.
The findings of Georgopoulos et al. (2012) were strengthened by our understanding
of the ongoing (for 30 years or so) inequality trends, with inequality not being evenly
distributed, but rather exhibiting strong bias towards the upper and the lower part of
the earnings pyramid. To put it simply, inequality benefits the 1% (or 10%) of the
population and harms the lower third (the well-known 2/3 society). In this particular
sense, relative poverty is perhaps the best proxy of recent inequality trends and it is
in this particular framework that we use it as our preferred inequality index, although
we admit that the earnings boom of the 1% of the population is not specifically
captured by it.
We also know that during the 5 or 6 years since what is generally considered
as the formal end of the Great Recession, inequality further deteriorated among
and within European Countries (or, at least, inequality has not improved). As a
result, we think that we are reasonably justified (to say the least) to expect trouble
ahead based on our current findings. Making the long story short, we expect that if
a new crisis occurs (which is obviously our prediction and not only on the grounds
of COVID-19), increased unemployment levels and thus a deeper crisis per se is
expected for the more unequal European countries and, perhaps, for EU as a whole
because of its increased internal inequality. This expectation for a “déjà vu” is still a
guess, but certainly an educated one, based on the fact that things have not changed
3 Theshare of persons with an equivalised disposable income below the risk-of-poverty threshold,
which is set at 60% of the national median equivalised disposable income after social transfers.
during the last several years. On the contrary, past trends continued and, albeit, at
an increasing speed. As for a historical analogy, we can think of the 1970s and
the stagnant inflation problem, when between the first and second oil crisis of the
decade, nothing of importance changed and, as a result, one could reasonably expect
that inflation predictors and/or causes in place for the first crisis would remain valid
for the second one too.
The structure of this chapter is as follows: Section 2 provides a selective review
of the literature to be followed by an elaboration of how the chapter at hand is linked
to the preexisting literature while (hopefully) complementing it (Sect. 3). In Sect. 4,
a description of the data and the methodology is provided with relevant empirical
results following in Sect. 5. A further discussion of specific aspects of the empirical
section can be found in Sect. 6, while Sect. 7 concludes also touching upon some
relevant policy implications.
2 Selective Literature Review
The vast majority of the literature which could be considered relevant to the major
points made in this chapter is based on the theory and practice of leading indicators.
The breaking point for this literature dates back to the 1970s when the first attempts
were launched to explain currency crises. Significant contributions include Bilson
(1979) and Krugman (1979). Another strand of the literature initiated in the 1990s
(often termed as “the Early Warning Mechanisms”) based on financial issues,
balance of payments crises, and currency crashes (featuring seminal contributions
by Kaminsky and Reinhart (1996) and Frankel and Rose (1996), Borio and Lowe
(2002)). Stock market/asset price crashes were later introduced in the literature, with
important contributions (only indicatively) by Grammatikos and Vermeulen (2010)
and Alessi and Detken (2011).
The latest economic crisis rekindled the interest in predictors of the crisis with
indicators being proposed by Rose and Spiegel (2011), Frankel and Saravelos (2012)
Babecký et al. (2012), Eichengreen and O’Rourke (2010), Gourinchas and Obstfeld
(2012) and Obstfeld (2015). Georgopoulos et al. (2012) made an attempt to link
crises to both economic and non-strictly economic variables, with encouraging
results for the latter.
3 Links to Previous Research and Contribution

to the Literature
In this chapter, we continue along the lines of an earlier paper (Georgopoulos

et al., 2012) referred to in the previous section—in some places expanding the
scope of the analysis (and/or differentiating it) while in some others gaining in
focus. In that paper Georgopoulos et al. (2012) were investigating possible paths
correlating the Great Recession in EU countries with preexisting levels of important
socioeconomic variables as expected (more or less) from economic theory. They
reached the rather surprising and, at the time, unorthodox conclusion that inequality
was a far better predictor of the relative strengths or weaknesses of individual EU
economies at the beginning of the Great Recession (data between 2008–2010 at
maximum) compared to more traditional/“orthodox” variables such as GDP per
capita and the competitiveness of each nation (as measured by the World Economic
Forum index). Now we aim at expanding that analysis by:
• Including data up to 2014, when analysts usually place the endpoint of the Great
Recession,
• expanding the model by adding two new predictive variables, i.e., public debt (as
a ratio to GDP) and a Reforms Index (we provide details on variables in Sect. 4),
• complementing the model by including not only predictive variables but also
policy variables, i.e., one variable used as a proxy for fiscal policy and one for
monetary policy (namely, fiscal deficit and changes in private debt, respectively).
Thus, the explanatory variables of our model are divided in two categories: on
one hand, we have predictive variables which correspond to initial conditions at a
certain point in time before the beginning of the Great Recession and, on the other,
we add policy variables for every year in tandem with the dependent variable (the
unemployment rate).
The reason for including policy variables is to remove “noise” from our
predictive endeavors. To be more specific, we wanted to extract/remove from our
model the significance of the policy measures taken by governments and the ECB
during the crisis years, so as to highlight the predictive power of the rest of the
variables net of countercyclical measures.4
We should also note that we restrict the crisis investigation to unemployment,
leaving aside other aspects of the Great Recession (the growth slowdown, interest
and CDS spreads differentiation, inclusion or not in special austerity programs under
the ad hoc financing schemes, etc.) which were investigated in previous papers. We
think this is no longer a problem since back then, almost 10 years ago, the exact
definition of the crisis was relatively more important-but this is not the case anymore
since unemployment is in the foreground as possibly the most important crisis factor
during the last 30 or so years and especially during the Great Recession. Thus, we
can reasonably restrict our attention there, without significant informative loss on
the impact of the crisis.
4 InGeorgopoulos et al. (2012) there was no such need, especially since the authors included data
only from the beginning of the recession, i.e., data not particularly affected by policy variables.
4 Data and the Model
We use data from the 28 EU member states, taken from the EUROSTAT statistical
database. We also use the World Economic Forum Global Competitiveness Report
for the competitiveness data and the OECD database for the reform indices. The
selection of the 28 EU countries as the target of our research is based on several
distinct factors. The first is the availability and comparability of the data used.
Harmonization is guaranteed to a significant degree and it is very important to make
international comparisons within a somehow homogenous environment by exclud-
ing rather inappropriate comparisons between countries with extremely different
structures and characteristics. The second and, possibly, the more important factor
is the relatively high credibility of the selected data.
The variables which have been taken into account are (data for the first five
variables refer to year 20015 since these variables are treated as possible predictors
of economic crisis):
• Inequality approximated by the Eurostat Index “At Risk-of-Poverty Rate” (which
is measured as the share of persons with an equivalised disposable income
below the risk-of-poverty threshold, which is set at 60% of the national median
equivalised disposable income after social transfers), 2001.
• Competitiveness Rank, 2001.
• GDP per capita (in logarithmic form), 2001.
• Public Debt as a percentage of GDP, 2001.
• A Reforms Index constructed as the average of the Employment Protection
Legislation (EPL) and the Product Market Regulation Indices (OECD Indices,
2001).
• Current level of public deficit as a percentage of GDP, 2008–2014.
• Change in private debt from year t − 1 to year t (as a percentage of GDP), 2008–
2014.
• Current unemployment rate, 2008–2014, (dependent variable).
We performed the empirical analysis using the Panel EGLS method with
diagonal correction of standard errors for heteroscedasticity and autocorrelation
(according to the White methodology). The choice of the estimator (fixed or random
effects) depends on whether individual effects are correlated with the regressors
and the Hausman specification test is usually used for that purpose. However,
in making that choice it is meaningful to consider whether we can treat our
sample as a random sample from a large population or not. Since our sample (EU
countries) is exhaustive of the population, it makes no sense to consider random
effects. Specifications with fixed effects were tried, but their performance was
relatively inferior based on the usual statistical/econometric criteria. Also, although
the presence of heteroskedasticity in the errors does not cause bias or inconsistency
5 We also tried using 2007 as the “benchmark” year with empirical results omitted due to space
limitations. These results, essentially similar with those reported here, are available upon request.
in estimators, it causes bias in variance and problems in inference. To correct for that
kind of bias, robust estimations of the standard errors were computed and presented
in the results.
Based on the results of our panel data estimators, we also performed a Dom-
inance Analysis in order to assess the relative importance of distinct predictors.
Building on the methodological approach of Kaminsky and Reinhart (1999) and
integrating elements of a regression analysis as suggested by the Dominance
Theory (among many others, see Bishop, Chakraborti, and Thistle (1988), Azen
and Budescu (2003), Georgopoulos et al. (2012), Sfakianakis, Georgopoulos, and
Papadogonas (2016)), we obtained an evaluation of the relative predictive power of
individual variables. The results are presented in Sect. 5.2.
5 Empirical Results
Results of the Panel Data estimations are presented in Sect. 5.1, to be followed by
results of the Dominance Analysis technique (Sect. 5.2).
5.1 Panel Estimation Results
The empirical results are reported in Table 1.

The overall fit of the model is quite satisfactory, with the combinations of
independent variables explaining a significant part of the variance of the dependent
variable (as shown by the corrected R2 and the tests on its statistical significance
using the F-statistic). All but two estimators are statistically significant at conven-
tional significance levels (more specifically at the 1% or 5% significance level).
A discussion about the estimators which turned out to be statistically insignificant
is provided in Sect. 6.
The estimators have the expected signs6 : poorer countries would be expected to
be more severely hit by a crisis and this is the case for highly indebted countries
(regarding public debt) while product market and/or labor market reforms do not
seem to affect (in our framework at least) the starting point of countries in a crisis
period. Also, the fiscal stimulus seems to be acting as a countercyclical factor as
expected (mitigating the effect of the crisis on unemployment) while this is not
so for monetary policy (measured by its effect on credit expansion/change of the
private sector’s indebtedness). However, we should note here that our sample period
is limited to the pre-Quantitative Easing period and our results could be different
when taking this ultimate policy measure into account. Nevertheless, the fact that the
need for Quantitative Easing became prominent after the end of our sample period
6 With a discussion for the Competiveness variable reserved for Sect. 6.

Table 1 Predictors of Variables Time period 2008–2014N = 196

unemployment
Inequality 0.243a
(3.33)
Per capita GDP −2.516a
(5.68)
Competitiveness −0.091a
(4.66)
Public debt 0.030b
(2.28)
Reforms 0.387
(0.57)
Public deficit −0.291a
(4.66)
Private debt change −0.032
(1.34)
Adj. R-squared 0.439
F-statistic 12.285a
t ratios are in parentheses. Standard errors are White
heteroscedasticity and autocorrelation consistent
a Significant at the 1% level (two-tailed test)
b Significant at the 5% level (two-tailed test)
is possibly an indication that monetary policy was practically ineffective during the
years of the Great Recession—something that our empirical results firmly grasp.
5.2 Results from Dominance Analysis
As mentioned above, in this section we attempt to determine the relative importance

of the potential crisis predictors using the technique described in Sect. 4. The results
are presented in Table 2.
These results and, more specifically, those from Rescaled Dominance (which
is usually used in the relevant literature) show a clear and almost undisputable
superiority of Inequality over other crisis predictors with GDP per capita following
with less than half of the predictive power of Inequality.
6 Further Discussion of Empirical Results
Some of the results mentioned above raise issues for further discussion. First, is
(the per capita) GDP issue and the surrounding literature since the Report by the
Commission on the Measurement of Economic Performance and Social Progress
Table 2 Results from Dominance analysis

Average R-Square Across Subsets
X1 X2 X3 X4
k Inequality GDP per capita Competitiveness Public debt
0 0.3510 0.2100 0.1450 0.0070
1 0.2717 0.1673 0.0423 0.0710
2 0.2170 0.0807 -0.0517 0.0347
3 0.2670 0.0300 -0.0570 -0.0220
General
Dominance 0.2767 0.1220 0.0197 0.0227
Rescaled
Dominance 62.7362 27.6644 4.4596 5.1398
(Stiglitz, Sen, & Fitoussi, 2009), which set out the agenda for going “Beyond GDP.”
The time has come not to annihilate the importance of GDP but actually make a
frog’s leap in front and beyond it as the outmost human success, happiness, and
sustainability index. Building, among others, on Worldbank’s Human Development
Indices (especially those corrected for Inequality—HDI), New Zealand’s economic
framework with its particular emphasis on five government priorities (improving
mental health, reducing child poverty, addressing the inequalities faced by indige-
nous Maori and Pacific island people, thriving in a digital age, and transitioning to
a low-emission, sustainable economy—see, indicatively, Ellsmoor (2019)) should
probably inspire the priorities of governments’ agendas around the globe. Inequality
issues are prioritized there (child poverty, inequality of indigenous people, etc). This
chapter underlines another road to downgrade the importance of GDP not only as a
measure of prosperity but as a crisis predictor as well.
Last but not least, some comments are in order regarding the World Economic
Forum Competitiveness Index and the Reforms index. Our results suggest that we
should be much more careful in prioritizing these two indices on the agenda of
economic policy—at least, as far as we are interested in economic crisis issues.
It is well-known that these two somehow similar policy goals were of primary
importance for economic reforms in the last 35–40 years or so. In this chapter, by
no means are we engaged in an effort to dismiss these two goals on the ground of
their long-term consequences on employment, or even more on economic growth,
as we recognize that their contribution in this respect must be obviously positive.
Such an effort should, in any case, mean scrutinizing the exhaustive list of more
than a hundred variables constituting the competitive index, in order to evaluate
their particular contribution towards employment and growth. Such an investigation
is far beyond our current endeavor. On the contrary, we limit our focus on the crisis
years (2008–2014). Regarding this period, the situation seems somehow paradoxical
as the competitiveness index seems to be contributing negatively to employment in
relative terms while our chosen proxy for reforms is not statistically significant.
There are several possible explanations. First, there is a real possibility that during
crisis years some factors, for example, capital (especially short-term speculative
financial capital movements) and even product/trade openness and integration, may
contribute negatively to stability and employment - on the contrary, generally
speaking and at “normal” periods these factors contribute positively to growth and
employment. Even more, there is also a remote, we must acknowledge, possibility
that we are in a process of a fundamental economic transformation, where past
economic policy “recipes” do not work particularly well anymore—not only during
the crisis years but overall. Possibly, it will be useful to stop using the compact
competitiveness index and attempt to calculate the merit of individual components
as far as their impact on unemployment is concerned. Along the same lines, a more
elaborated index for reforms effort should be in order. As these are items of a future
research agenda, in this chapter we conclude that these two generally important
indices have limited predictive power regarding economic crises.
7 Conclusion and Policy Implications
There are some, in our view, important ideas emerging from the empirical results of
our model—some of them clear-cut and robust, some others less so. In any case, the
importance of inequality (in the sense adopted herein), with its particular emphasis
on the poorer part of the population cannot be easily dismissed. We should note here
that these results replicate the results of previous endeavors regarding inequality—
even more so using a different methodology yielding statistically significant results.
We firmly believe that this particular finding is even more significant compared to
previous contributions because in this chapter at hand:
• The sample covers the whole crisis period (instead of just the beginning of it)
thus making conclusions safer,
• By introducing in our model the novelty of including predictive variables along
with economic policy ones, we were able to extract “noise” by attributing their
fair share to policy variables thus concentrating on the prognostic power of our
predictive ones,
• We added/tried new predictors to the set adopted in previous research efforts.
From the analysis above we extract two important conclusions. First that without
a rigor inclusion of the inequality issue in formal economic analysis, there will
always be a certain ambivalence on its role, as a premium or secondary, or even
less important source of a crisis. Second, taking our results at face value, we expect
an even more severe repeated version of the Great Recession, exactly because
of the inequality issue, which remained unresolved and critically deteriorated the
last few years—possibly (among others) through the ways quantitative easing was
conducted.
Along with the above theoretical considerations, this chapter offers some possi-
ble insights regarding economic policy—most important of which is the importance
of relative poverty as a proxy of societal inequality on the unemployment problem.
As we mentioned above, during the 3 or 4 last recessions unemployment steadily
increased and was there to stay for prolonged periods. Especially during the last
crisis, the years of the Great Recession, unemployment evolved into a real societal
plague—even more so for the countries harder hit by the crisis. Furthermore,
the situation only slightly improved after these years and now we are probably
entering again a new unemployment trap, triggered and/or partially generated by
the Covid-19 pandemic. Above we suggested that our findings concerning relative
poverty/inequality could be cautiously used for a “softer landing” during the
upcoming recession/depression. This would require interventions, more specifically
in order to alleviate the emerging poverty of the precarious part of EU country
populations who work mainly in the services sector, often under insecure and poorly
paid terms. Indirectly, this would also be a significant stimulus for aggregate demand
and, consequently, employment. So this chapter could be a modest proponent of
income boosting/redistributing measures, especially during the forthcoming period,
targeting the lower income stratums in contrast, for example, to “traditional”
measures aimed at improving long-term growth and employment opportunities
(such as these promoting competitiveness which can probably wait for better times).
Should this not be the policy option, we feel confident to predict both social cohesion
and economic problems lying ahead of EU nations and especially the more heavily
burdened ones.
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Should Market Makers Hedge with
Realised or Implied Volatility?
Abstract A major challenge faced by market makers is the hedging of contingent

liabilities. Option sellers often hedge contingent claims in the classical Black–
Scholes framework. Standard theory suggests that the value of an option can be
replicated exactly by rebalancing a portfolio of shares and cash continuously. This is
referred to as delta-hedging. In the Black–Scholes framework, an explicit solution is
available to calculate delta. Market participants agree on most inputs in this formula.
Volatility, however, remains an elusive parameter. This leads to the question: Should
market makers hedge their liabilities using realised or implied volatility? In this
paper, we show that a market maker should choose to hedge their portfolio with
implied volatility, since this is less risky than hedging with realised volatility.
Keywords Black–Scholes · Realised volatility · Implied volatility · Volatility

skew · Delta-hedging
1 Introduction
Black and Scholes (1973) created a framework for the pricing of European options
by making certain assumptions about the underlying asset. For one, the authors
assumed that the volatility of the underlying asset is constant. Based on this
assumption and the assumption of lognormal returns (see Black & Scholes 1973),
the authors showed that a European option can be replicated exactly by constructing
A. Levendis · P. Venter ()

Department of Finance and Investment Management, University of Johannesburg, Johannesburg,
South Africa
Department of Actuarial Science, University of Pretoria, Hatfield, South Africa
E. Maré
Department of Mathematics and Applied Mathematics, University of Pretoria, Hatfield, South
Africa
https://doi.org/10.1007/978-3-030-63970-9_29
422 A. Levendis et al.
a portfolio of shares and cash. Assuming continuous trading, the value of the
portfolio will be exactly equal to the value of the European option. This process
is termed delta-hedging. The remarkable piece of work led to the famous Black–
Scholes formula.
Prior to the stock market crash of 19 October 1987, now known as Black Monday,
the assumption of constant volatility, lognormal returns, and continuous trading
seemed reasonable. However, on that day, the Dow Jones Industrial Average fell
by 22.6%, its largest one-day percentage drop in history. This event would go on to
change the way option markets operate forever.
An interesting discovery was made by Black (1976), long before Black Monday.
The author discovered that volatility and asset returns are negatively correlated in
general. When asset prices increase, volatility tends to decrease. Alternatively, when
asset prices decrease, volatility tends to increase. This is termed the leverage effect.
It is worth mentioning the contradiction here. In 1973, Black and Scholes (1973)
made the assumption that volatility of the underlying asset is constant. In 1976,
however, Black (1976) found that volatility moves in the opposite direction to the
underlying asset. Before Black Monday, Black’s finding was not as significant as it
is today, and the reason for this is the volatility skew.
The volatility skew is a two-dimensional plot that represents the relationship
between implied volatility and strike price for options on the same underlying
asset at the same maturity (see Hull 2012). Implied volatility is a theoretical
quantity implied by option prices observed in the market (Hull, 2012). Prior to
Black Monday, no skew was observed in the market. This means that European
options were priced at the same implied volatility across different strike prices for a
given maturity. After Black Monday, out-of-the-money European put options started
trading at higher implied volatility than in-the-money European put options. The
Black–Scholes model assumptions of constant volatility and lognormal returns were
flawed.
Successful models have since been created in the Quantitative Finance literature
to address the leverage effect and volatility skew. Local volatility (Derman &
Derman, 1994; Dupire, 1994), stochastic volatility (Heston, 1993), and Generalized
Autoregressive Conditional Heteroskedasticity (GARCH) (Bollerslev, 1986) models
are a few that can address the limitations of the Black–Scholes model.
Before Black Monday, market makers of contingent claims could hedge using
the realised constant volatility of the underlying asset. This is because markets
essentially portrayed constant volatility behaviour, and it was not necessary to
account for the volatility skew. Model risk was not accounted for. Today, realised
volatility is vastly different from implied volatility because of the leverage effect
and volatility skew. This means that market makers need to choose which volatility
estimate to input in the delta-hedging formula.
In this paper, we show the hedge error formulas when a market maker chooses
to hedge with realised or implied volatility, referencing the work of Ahmed and
Wilmott (2005). For our experiment, we consider a controlled environment with a
single share price trajectory. We then show the cumulative profit or loss (PnL) to
Should Market Makers Hedge with Realised or Implied Volatility? 423
be made by the market maker using either realised volatility or implied volatility as
hedging parameter input.
The rest of this paper is structured as follows: Sect. 2 describes the main
difference between realised and implied volatility, in Sect. 3 we derive the hedge
error formulas for a short European call option, Sect. 4 shows our results, and Sect. 5
concludes the findings.
2 The Difference Between Realised and Implied Volatility
In this section, we discuss the difference between realised or actual volatility

and implied volatility by means of an example. Consider the case where the
market prices European options according to the volatility skew below. Note that
implied volatility is forward-looking and measures the market’s expectation of
future volatility (Fig. 1).
We assume that we are working in the classical Black–Scholes framework.
Therefore, we assume that the underlying asset follows a lognormal distribution
under the risk-neutral measure Q:
dSt = rSt dt + σ St dWt , (1)
where r is the risk-free rate of return, σ is the instantaneous volatility of the

underlying asset, and Wt is standard Brownian motion.
Market Implied Volatility

45%
40%
35%
Implied Volatility
30%
25%
20%
15%
10%
5%
0%
0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6
Moneyness (K/S)
Fig. 1 Market implied volatility skew example

Let us pause a moment to discuss σ in Eq. (1). This input is generally calculated
from historical asset prices by transforming the prices to log returns and calculating
σ as
√
σ = σDaily × 252.
Note that σ is backward-looking since it is calculated from historical information.

When σ is used in Eq. (1), the assumption is that future volatility will be equal to
past volatility, which is not necessarily a reasonable assumption. Assuming σ =
30% in Eq. (1), and pricing European call options at different strike prices with the
Black–Scholes formula, will yield no implied volatility skew as shown in Fig. 2.
Figure 2 shows that the Black–Scholes model with constant volatility is unable
to capture the market implied volatility skew. The volatility skew is a reason why
hedging errors occur.
Next, consider the case where a market maker sells a European call option with
strike price K = 1000. Figure 3 shows a single trajectory for the underlying asset
price, and the realised 30-day moving average volatility.
Note that the underlying asset price and realised volatility are inversely corre-
lated. Black (1976) refers to this as the leverage effect. When the underlying asset
price increases, volatility tends to decrease, and vice versa. The leverage effect is
another reason why hedging errors occur.
Fix K and consider the case where the European call option is in-the-money,
that is, where St > K. In this case, moneyness, or KS < 1. From Fig. 1, implied
volatility generally increases as St increases. Alternatively, implied volatility tends
to decrease as St decreases since KS > 1. Hence, implied volatility for a European

45%
40%
35%
Implied Volatility
30%
25%
20%
15%
10%
5%
0%
0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6
Moneyness (K/S)
Market Implied Volatility Model Implied Volatility
Fig. 2 Market implied volatility skew vs. constant volatility skew

Underlying Asset vs Volatility Trend

1400 40.00%
1200 35.00%
1000 30.00%
25.00%
Volatility
800
Price
20.00%
600
15.00%
400 10.00%
200 5.00%
0 0.00%
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91
Days
Share Price Strike Price Volatility
Fig. 3 Underlying asset trend vs. volatility trend—leverage effect
option generally moves in the same direction as the underlying asset price, and in
the opposite direction to realised volatility. This relationship amplifies the hedging
error. In the next section, we will show that the hedge error is a function of the
distance between implied volatility and realised volatility.
A market maker can choose to input either the realised volatility or implied
volatility in the delta-hedging formula, but which one should he or she choose?
Ahmed and Wilmott (2005) and Carr and Madan (1998) answer this question by
deriving hedge error formulas, as shown in the next section.
3 Delta-Hedging and Hedging Errors
Consider the case where a market maker sells a European call option. In what
follows, we use the same notation as in Ahmed and Wilmott (2005), and also
the work by Carr and Madan (1998), to derive formulas for the hedge error when
hedging with realised or implied volatility. Note that the authors consider a long call
option in their paper. We consider a short call option.
We apply the standard Black–Scholes delta formula in our workings:
Δ = N(d1 ),

ln SKt + r(T − t) + 12 x 2 (T − t)
d1 = √ ,
x T −t
where T is the maturity of the option, and x is either the realised volatility or implied
volatility.
Table 1 Hedge portfolio construction

Realised volatility hedge Implied volatility hedge
Call option −V i −V i
Stock Δa St Δi St
Cash V i − Δa St V i − Δi St
When a market maker sells a European call option at t = 0 and decides to hedge
with realised or implied volatility, the delta-hedging portfolio is detailed in Table 1.
In Table 1, superscript i refers to implied volatility, whereas superscript a refers
to actual or realised volatility. Furthermore, σ represents the realised volatility, and
σ̃ represents implied volatility and can easily be extended to be time varying.
From Ahmed and Wilmott (2005), using Itô’s lemma, the PnL over the period dt
when hedging with realised volatility is given by

Δa dSt + r V i − Δa St dt − dV i

= Δa (rSt dt + σ St dWt ) + r V i − Δa St dt
i
∂V ∂V i 1 ∂ 2V i
− dt + dSt + (dSt ) 2
∂t ∂St 2 ∂St2
∂V i ∂V i
= Δa (rSt dt + σ St dWt ) + r V i − Δa St dt − dt − (rSt dt + σ St dWt )
∂t ∂St
1 ∂ 2V i
− σ 2 St2 dt.
2 ∂St2
∂V i
Since V i satisfies the Black–Scholes equation and ∂St = Δi , we have
∂V i 1 ∂ 2V i ∂V i
Δa (rSt dt + σ St dWt ) + dt + rSt Δi dt + σ˜2 St2 dt − Δ a
rSt dt − dt
∂t 2 ∂St2 ∂t
1 ∂ 2V i
− Δi (rSt dt + σ St dWt ) − σ 2 St2 dt
2 ∂St2
1 ˜2 ∂V i
= σ − σ 2 St2 2 dt + Δa − Δi σ St dWt . (2)
2 ∂St
Alternatively, if a market maker hedges a short European call option with implied
volatility, Ahmed and Wilmott (2005) show that the PnL is given by

Δi dSt + r V i − Δi St dt − dV i

= Δi (rSt dt + σ St dWt ) + r V i − Δi St dt
i
∂V ∂V i 1 ∂ 2V i
− dt + dSt + (dSt ) 2
∂t ∂St 2 ∂St2
∂V i ∂V i
= Δi (rSt dt + σ St dWt ) + r V i − Δi St dt − dt − (rSt dt + σ St dWt )
∂t ∂St
1 ∂ 2V i
− σ 2 St2 dt.
2 ∂St2
Following the same procedure as for Eq. (2), we have
∂V i 1 ∂ 2V i ∂V i
Δi (rSt dt + σ St dWt ) + dt + rSt Δi dt + σ˜2 St2 dt − Δ i
rSt dt − dt
∂t 2 ∂St2 ∂t
1 ∂ 2V i
− Δi (rSt dt + σ St dWt ) − σ 2 St2 dt
2 ∂St2
1 ˜2 ∂V i
= σ − σ 2 St2 2 dt. (3)
2 ∂St
Clearly, Eqs. (2) and (3) display one key difference. Equation (2) has an
additional stochastic term. This implies that it could be more risky to hedge with
realised volatility. In the next section, we test this using a single share path.
4 Results
In this section, we create a controlled market environment and show the cumulative
PnL profiles when a market maker decides to hedge with realised versus implied
volatility.
Consider a single share price trajectory together with its rolling 30-day realised
volatility:
Note the leverage effect here. When the underlying asset price increases, the
volatility decreases, and vice versa.
Now, let us assume that the market is pricing European options on the share price
in Fig. 4 according to the volatility skew Fig. 5:
Assume that the market volatility skew remains static through time.
A market maker decides to sell a European call option on the share price in
Fig. 4. The option is initially sold at-the-money. The implied volatility and realised
volatility will vary through time as the share price varies as shown in Fig. 6.
In Fig. 6, the shaded area represents the share price. Note how the implied
volatility moves in the same direction as the share price, whereas the realised
volatility moves in the opposite direction. Clearly, this option expires in-the-money
since ST > K.
Let us consider the PnL profiles when hedging with the different volatility
estimates. Figure 7 shows the cumulative PnL over time for a European call option,
Underlying Asset vs Volatility Trend

1400 50.00%
45.00%
1200
40.00%
1000 35.00%
Volatility
800 30.00%
Price
25.00%
600 20.00%
400 15.00%
10.00%
200
5.00%
0 0.00%
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91
Days
Share Price Volatility
Fig. 4 Controlled market environment

60%
50%
Implied Volatility
40%
30%
20%
10%
0%
0.84
0.9
0.94
0.96
0.8
0.82
0.86
0.88
0.92
0.98
1.02
1.04
1.06
1.08
1.1
1.12
1.14
1.16
1.18
1.2
1
Moneyness (K/S)
Fig. 5 Market implied volatility skew
initially sold at an implied volatility of 30%, expiring in 91 days, and hedging with
different volatility inputs:
The PnL is shown as a percentage of the initial option premium. Note how the
PnL from the implied volatility hedge is smoother than the realised volatility hedge.
This aligns to the formulas derived in Sect. 3. Furthermore, when realised volatility
increases, PnL decreases, whereas PnL increases when realised volatility decreases.
Clearly, in terms of a risk management perspective, a market maker should
choose to hedge their portfolio with implied volatility since this will eliminate any
stochastic behaviour.
Realised vs Implied Volatility

1400 60.00%
1200 50.00%
1000
40.00%
Volatility
800
Price
30.00%
600
20.00%
400
200 10.00%
0 0.00%
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91
Days
Share Price Strike Price Realised Volatility Implied Volatility
Fig. 6 Realised vs. implied volatility
Cumulative PnL as % of Option Premium

150%
100%
Cumulative PnL
50%
0%
-50%
-100%
-150%
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86
Days
Implied Volatility Realised Volatility
Fig. 7 Cumulative PnL
5 Conclusion
In this paper, we showed that market makers should hedge their contingent liabilities
with implied volatility, since this will lead to a PnL profile that is deterministic.
However, delta-hedging is not sufficient to eliminate all risks in a portfolio. The
existence of the volatility skew and leverage effect means that market makers need to
think not only about the sensitivity of the option with regard to the underlying asset
price but also to movements in volatility as this is clearly not a constant quantity.
An area for future research might include a delta-vega hedging strategy.
References
Ahmed, R., & Wilmott, P. (2005). Which free lunch would you like today, sir?: Delta hedging,
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Black, F. (1976). Studies of stock price volatility changes. In Proceedings of the Business and
Economics Section of the American Statistical Association (pp. 177–181). Washington, DC:
American Statistical Association.
Black, F., & Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of
Political Economy, 81(3), 637–654.
Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of Econo-
metrics, 31(3), 307–327.
Carr, P., & Madan, D. (1998). Towards a theory of volatility trading. In volatility: New estimation
techniques for pricing derivatives (pp. 417–427). London: Risk Books.
Derman, E., & Kani, I. (1994). Riding on a smile. Risk, 7(2), 32–39.
Dupire, B. (1994). Pricing with a smile. Risk, 7(1), 18–20.
Heston, S. (1993). A closed-form solution for options with stochastic volatility with applications
to bond and currency options. The Review of Financial Studies, 6(2), 327–343.
Hull, J. (2012). Options, futures and other derivatives (8th ed.). Upper Saddle River: Prentice Hall.
Stress Testing Option Sensitivities
in a Stochastic Market
Abstract The Heston stochastic volatility model aims to parameterise the equity
market with 5 specific parameters. It is arguably one of the most popular models
used in option pricing, since it relaxes the Black–Scholes assumption of constant
volatility, and can capture the observed equity skew. Another reason for its popular-
ity is the fact that it has an analytical solution for European options and associated
option sensitivities called the Greeks. In this paper, we analyse the sensitivity of
the three main option sensitivities: Delta, Gamma, and Vega, to changes in market
conditions. We specifically test what happens to each option sensitivity in a bear
market—as we currently face in the wake of COVID-19. We find that the option
sensitivities are linked to the Heston model parameters; therefore, the Heston model
parameters should give market makers an idea of future option behaviour.
Keywords Heston model · Stochastic volatility · Delta · Gamma · Vega ·

Sensitivity
1 Introduction
The Black–Scholes model created by Black and Scholes (1973) provides a frame-
work for the pricing and hedging of European options under certain assumptions.
This framework is one of the fundamental building blocks in the Quantitative
Finance literature, and many models have since been created as an extension of the
A. Levendis · P. Venter ()

Department of Finance and Investment Management, University of Johannesburg, Johannesburg,
South Africa
Department of Actuarial Science, University of Pretoria, Hatfield, South Africa
E. Maré
Department of Mathematics and Applied Mathematics, University of Pretoria, Hatfield, South
Africa
https://doi.org/10.1007/978-3-030-63970-9_30
initial Black–Scholes model, for example, the stochastic volatility model created by
Heston (1993).
It is well known that the volatility of the underlying asset is not constant as
initially proposed by Black and Scholes (1973). Instead, volatility behaves randomly
through time. Heston (1993) models the volatility of the underlying asset as a Cox–
Ingersoll–Ross mean-reverting process to describe this random behaviour (see Cox,
Ingersoll, & Ross 1985). The power of this model lies in its analytical tractability.
The Heston stochastic volatility model has an analytical solution for European
options. The solution is not as simple as the Black–Scholes solution for European
options and certainly requires more computing power. Nevertheless, the existence
of an analytical solution simplifies calibration to market data, and also computation
of option sensitivities called the Greeks.
The Greeks receive considerably less attention than pricing in the Quantitative
Finance literature. This is surprising given the nature of business conducted by an
investment bank. One of their main responsibilities is to manage the risk inherent
in option portfolios. The Heston stochastic volatility model can be used by risk
managers to hedge their liabilities.
We consider the three main Greeks in this paper: Delta, Gamma, and Vega.
According to Hull (2012), Delta is defined as the rate of change of the option price
with respect to the price of the underlying asset. Gamma is defined as the rate of
change of Delta with respect to the price of the underlying asset (Hull, 2012). Lastly,
Vega is defined as the rate of change of the option price with respect to the volatility
of the underlying asset (Hull, 2012).
The aim of this paper is to analyse the effect of market conditions on the three
Greeks: Delta, Gamma, and Vega. We create a base scenario resembling normal
market conditions. We then create a bear market condition by changing the base
Heston model parameters and compare the resulting Greeks to the base case. This
problem is highly relevant in the current economic climate caused by the COVID-19
pandemic. The content of this paper can be used by risk managers to gain a better
understanding of how option portfolios behave during a crisis.
The rest of this paper is structured as follows: Sect. 2 introduces the Heston
stochastic volatility model and its analytical solution for a European call option,
Sect. 3 shows the analytical solutions for the Greeks: Delta, Gamma, and Vega,
Sect. 4 shows our results, and Sect. 5 concludes the findings.
2 The Heston Stochastic Volatility Model
Heston (1993) models the underlying asset process and volatility process according
to the following stochastic differential equations:
√
dSt = rSt dt + vt St dWt1
√
dvt = κ(θ − vt )dt + σ vt dWt2
Stress Testing Option Sensitivities in a Stochastic Market 433
dWt1 dWt2 = ρdt,
where κ is the mean reversion speed of the variance, θ is the long-run mean of the
variance, σ is the volatility of the variance, and ρ is the correlation between the asset
price and the variance. Hence, Heston (1993) models volatility as a Cox–Ingersoll–
Ross process (see Cox et al. 1985).
Heston (1993) shows that the closed-form solution for a European call option,
assuming that the underlying asset is driven by stochastic volatility, is given by
V (St , vt , t) = St P1 (xt , vt , t) − Ke−r(T −t) P2 (xt , vt , t), (1)
where
xt = ln(St ),
τ = T − t,
# $ %
1 1 ∞ e−iφ ln(K) fj (xt , vt , t)
Pj (xt , vt , t) = + Re dφ,
2 π 0 iφ
fj (xt , vt , t) = eC(T −t;φ)+D(T −t;φ)vt +iφxt ,
and

a 1 − gedτ
C(T − t; φ) = rφiτ + 2 (bj − ρσ φi + d)τ − 2 ln ,
σ 1−g

bj − ρσ φi + d 1 − edτ
D(T − t; φ) = ,
σ2 1 − gedτ
bj − ρσ φi + d
g= .
bj − ρσ φi − d
Furthermore, for j = 1, 2,
1 1
u1 = , u2 = − , a = κθ, b1 = κ − ρσ, b2 = κ,
2 2
and
&
d= (ρσ φi − bj )2 − σ 2 (2uj φi − φ 2 ).
Equation (1) can be differentiated with respect to the underlying variables to

obtain the Greeks. In the next section, we show the analytical solutions for Delta,
Gamma, and Vega based on the Heston stochastic volatility model.
3 The Heston Greeks: Delta, Gamma, and Vega
Bakshi, Cao, and Chen (1997) and Bakshi and Madan (2000) show that the Delta of
a European call option in the Heston stochastic volatility model is given by
Δt = P1 (xt , vt , t). (2)
Δt describes the sensitivity of the option price with respect to the price of the
underlying asset. It can be used to hedge an option portfolio against movements in
the underlying asset.
Differentiating Δt in Eq. (2) yields the formula for Gamma. Rouah (2013) shows
Gamma is given by the equation:
# ∞
∂P1 1
Γt = = Re[e−iφ ln(K) f1 (xt , vt , t)]dφ. (3)
∂St π St 0
Γt describes the sensitivity of Δt with respect to the price of the underlying

asset. A higher value for Γt means that the hedging portfolio must be rebalanced
more frequently to keep it Delta-Neutral.
Vega is slightly more complex. The Heston parameters v0 and θ represent the
initial level of variance and the long-run mean of the variance. Zhu (2010)
√ defines
√
two Vegas, the first based on x = v0 , and the second based on y = θ . We only
√
consider the first Vega in this paper, that is, Vega based on x = v0 as this measures
sensitivity to variance akin to the Black–Scholes paradigm. The equation is shown
in the textbook by Rouah (2013) and is given by
∂P1 √ ∂P2 √
νt = St 2 v0 − Ke−rτ 2 v0 , (4)
∂v0 ∂v0
where
# $ %
1 ∞ e−iφ ln(K) fj (xt , vt , t)D(T − t; φ)
Pj (xt , vt , t) = Re dφ,
π 0 iφ
νt describes the sensitivity of the option price with respect to the volatility of
the underlying asset. It can be used to make an option portfolio immune against
movements in volatility.
In the next section, we analyse the effect of changing market conditions on the
three Greeks defined in Eqs. (2)–(4).
4 Results
The Heston stochastic volatility model gives a parameterisation of market con-

ditions. In this section, we start by creating a base scenario, which we will call
the normal market. We simulate paths for the underlying asset price and volatility
based on the Heston model parameters in this normal market. Next, we stress the
Heston model parameters to represent a bear market as we currently face in the
wake of COVID-19. This is done by reducing the mean reversion speed of the
volatility, increasing the volatility of volatility, and setting the correlation between
the underlying asset price and volatility to be highly negative. We then analyse the
impact of the change in market conditions on the Greeks.
4.1 Base Scenario: Normal Market Conditions
Table 1 shows the Heston model parameters that we have chosen to represent the
normal market:
The following figures show the distribution of the respective Greeks based on
1000 simulations for an at-the-money European call option struck at K = 100,
expiring in 90 days. The current share price is S0 = 100.
It is clear from Fig. 1 that the distribution for Delta becomes wider as time
increases. This aligns with expectations since there is more uncertainty the further
we move into the future. Note the tails of the distribution at maturity. An option
that expires in-the-money has a Delta of 1 at maturity, whereas an out-of-the-money
option expires with a Delta of 0 at maturity.
Figure 2 shows that Gamma remains relatively stable through time. This means
that Delta changes at a relatively constant rate through time. Note that the underlying
asset cannot be used to achieve a Gamma-Neutral portfolio. This is because Gamma
has a non-linear relationship with the underlying asset price. To achieve Gamma-
Neutrality, an option has to be added to the hedging portfolio (see Hull 2012).
Figure 3 shows that the option price is highly sensitive to Vega when the option
is far from maturity. As the option moves closer to maturity, Vega decreases.
Similar to Gamma, the underlying asset cannot be used to make an option port-
folio Vega-Neutral because Vega has a non-linear relationship with the underlying
asset. Furthermore, volatility is not traded in the market. Therefore, an option must
be added to the hedging portfolio in order to achieve Vega-Neutrality (see Hull
2012).
In the next section, we show the distribution of the Greeks in a stressed market.
Table 1 Normal market v0 κ θ σ ρ

parameters
0.1 1 0.1 0.3 −0.6
Distribution of Delta: Normal Market
Frequency 1000
500
0
90
80
70
60
50
40
30
20
10
Days Ahead
1 1.25
0.5 0.75
0
Delta
Fig. 1 Delta distribution—normal market conditions
Distribution of Gamma: Normal Market
90
80
1000 70
60
Frequency
500 50
40
0
30
0
20
0.04
10 Days Ahead
0.08
Gamma
Fig. 2 Gamma distribution—normal market conditions

Distribution of Vega: Normal Market
90
80
70
1000
60
Frequency
500 50
40
0
30
0
20
12
10 Days Ahead
24
Vega
Fig. 3 Vega distribution—normal market conditions
Table 2 Stressed market v0 κ θ σ ρ

parameters
0.1 0.8 0.1 0.4 −0.9
4.2 Stressed Scenario: Bear Market Conditions
Table 2 shows the Heston model parameters we have chosen to represent a

stressed market. We have decreased the mean reversion speed of volatility, increased
the volatility of volatility, and set the correlation between the volatility and the
underlying asset to be highly negative. We consider the same European call option
as in Sect. 4.1.
Figures 4, 5 and 6 show the distribution of the Greeks based on the stressed
Heston parameters, similar to the figures shown in Sect. 4.1. We analyse the change
in market conditions on the respective Greeks in the next section.
4.3 Analysis of Results
In this section, we compare the mean and volatility of each Greek in the normal
market and stressed market.
Figure 7 shows the averaged Delta over time for each of the market conditions:
Figure 7 shows that the expected Delta is lower in a stressed market compared to
a normal market.
Delta is lower in a stressed market because higher volatility increases the
likelihood that the European call option will expire out-of-the-money. Therefore,
Distribution of Delta: Stressed Market
Frequency 1000
500
0
90
80
70
60
50
40
30
20
10
Days Ahead
1 1.25
0.5 0.75
0
Delta
Fig. 4 Delta distribution—stressed market conditions
Distribution of Gamma: Stressed Market
90
80
1000 70
Frequency
60
500 50
40
0
30
0
20
0.04
10 Days Ahead
0.08
Gamma
Fig. 5 Gamma distribution—stressed market conditions

Distribution of Vega: Stressed Market
90
80
70
1000
60
Frequency
500 50
40
0
30
0
20
7
10 Days Ahead
14
Vega
Fig. 6 Vega distribution—stressed market conditions
Expected Delta over time

0.65
Normal Market
Stressed Market
0.6
0.55
Delta
0.5
0.45
0.4
0 10 20 30 40 50 60 70 80 90
Days Ahead
Fig. 7 Delta expected value
a risk manager wanting to hedge his portfolio of short European call options can
purchase less shares in the underlying asset in a stressed market compared to a
normal market.
Expected Gamma over time

0.023
0.022
0.021
0.02
0.019
Gamma
0.018
0.017
0.016
Normal Market
0.015 Stressed Market
0.014
0.013
0 10 20 30 40 50 60 70 80 90
Days Ahead
Fig. 8 Gamma expected value
Next, we show the expected Gamma over time for each market condition.
Figure 8 shows that the expected Gamma is lower in a stressed market compared
to a normal market.
In a stressed market environment, an option will quickly move out-of-the-money
or in-the-money. This means that Delta will be close to 0 or close to 1. There is
a greater chance of us knowing whether the option will expire out-of-the-money or
in-the-money before the maturity date. Therefore, Delta will change at a slower rate.
Alternatively, if the underlying asset price is close to the strike price, the option can
expire either out-of-the-money or in-the-money. Therefore, Gamma is the highest
for at-the-money options.
Next, we show the expected Vega over time for each market condition.
Figure 9 shows that the expected Vega is lower in a stressed market environment
compared to a normal market.
Vega behaves similar to Gamma as it is the highest for at-the-money options.
Since a stressed market environment pushes the underlying asset price further from
the strike price, Vega is lower in a stressed market compared to a normal market.
Therefore, in a stressed market, a risk manager can hold less options in his hedging
portfolio compared to a normal market to eliminate Vega risk.
The following figures show the variability of the Greeks over time. First, we show
the variability of Delta for each market condition.
Figure 10 shows that the variability of Delta is lower in a stressed market
Expected Vega over time

25
Normal Market
Stressed Market
20
15
Vega
10
0
0 10 20 30 40 50 60 70 80 90
Days Ahead
Fig. 9 Vega expected value
Volatility of Delta over time

0.5
Normal Market
0.45
Stressed Market
0.4
0.35
Delta Volatility
0.3
0.25
0.2
0.15
0.1
0.05
0
0 10 20 30 40 50 60 70 80 90
Days Ahead
Fig. 10 Delta variability

Volatility of Gamma over time

0.045
Normal Market
0.04 Stressed Market
0.035
0.03
Gamma Volatility
0.025
0.02
0.015
0.01
0.005
0
0 10 20 30 40 50 60 70 80 90
Days Ahead
Fig. 11 Gamma variability
As explained earlier, the variability of Delta increases as we move further into

the future. The variability of Delta is lower in a stressed market compared to a
normal market because the underlying asset will quickly move out-of-the-money or
in-the-money. Therefore, in the case of a stressed market, there is a higher chance
of us knowing if the option is going to expire out-of-the-money or in-the-money
before it reaches maturity. A risk manager can expect less variability in Delta when
rebalancing his or her portfolio.
Next, we show the variability of Gamma for each market condition.
Figure 11 shows that the variability of Gamma is lower in a stressed market
As explained in Fig. 8, the underlying asset is pushed further from the strike price
in a stressed market. Therefore, Gamma has lower variability in a stressed market
because there is a higher chance of the option moving away from the at-the-money
level. A risk manager can expect to make smaller Delta adjustments to his or her
hedge portfolio in a stressed market.
Finally, we show the variability of Vega for each market condition.
Figure 12 shows that the variability of Vega is lower in a stressed market
As explained earlier, Vega behaves similar to Gamma as it is the highest for at-
the-money options. Since the underlying asset price will move further away from
the strike price in a stressed market, the variability of Vega is lower in a stressed
Volatility of Vega over time

5
Normal Market
4.5 Stressed Market
3.5
Vega Volatility
2.5
1.5
0.5
0
0 10 20 30 40 50 60 70 80 90
Days Ahead
Fig. 12 Vega variability
market compared to a normal market. A risk manager can expect to make smaller
Vega adjustments in his or her hedge portfolio in a stressed market.
The variability of Vega shows an interesting shape as it increases up to a certain
point and then starts to decrease. A possible explanation for this is that the option
may have reached a Delta of near 0 or 1 at the turning point; thereafter, changes in
volatility have little impact on the option price.
In the next section, we conclude our findings.
5 Conclusion
Option contracts have many subtleties that elude the naked eye. Knowing what
drives the price of an option is critical to ensure that a risk manager can reduce
the risk inherent in option portfolios.
In this paper, we have shown the non-linear relationships observed in option
markets. As a matter of fact, one would expect that a stressed market environment
leads to higher risk when hedging a short position in a European call option. We
have shown that this is not necessarily the case as the three main option sensitivities:
Delta, Gamma, and Vega each had lower expectation and volatility compared to a
normal market.
We propose that the Heston stochastic volatility model can be used as a stress
testing tool since it gives a reasonable parameterisation of market conditions and
analytical solutions for the Greeks. A risk manager could then update the Heston
model parameters based on his or her expected view of the market and analyse the
impact on the Greeks.
References
Bakshi, G., Cao, C., & Chen., Z. (1997). Empirical performance of alternative option pricing
models. Journal of Finance, 52(5), 2033–49.
Bakshi, G., & Madan, D. (2000). Spanning and derivative-security valuation. Journal of Financial
Black, F., & Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of
Political Economy, 81(3), 637–654.
Cox, J., Ingersoll, J., & Ross, S. (1985). A theory of the term structure of interest rates.
Econometrica, 53(2), 385–407.
Heston, S. (1993). A closed-form solution for options with stochastic volatility with applications
to bond and currency options. The Review of Financial Studies, 6(2), 327–343.
Hull, J. (2012). Options, futures and other derivatives (8th ed.). Upper Saddle River: Prentice Hall.
Rouah, F. (2013). The Heston model and its extensions in Matlab and C#. Hoboken: Wiley.
Zhu, J. (2010). Applications of Fourier transform to smile modeling: Theory and implementation
(2nd ed.). New York, NY: Springer.
Firm Performances and the Onset
of Shocks in India
Elangovan Avinash
Abstract A firm’s exhibition of its highest corporate governance (CG) standards

determines its identity among the rest of the players within an economy. Albeit
maintaining such standards, there are also external macroeconomic factors effecting
firm performances that are beyond the control of the board and its stakeholders.
This paper highlights the behavior of firms under such instances of macro shocks,
in this chapter being, demonetization episode in India and the corporate tax cut
reforms, that influence CG performances. A pooled estimation regression technique
of top 30 listed firms in India is used to show the above relation with the period
considered being, from FY2013-14 to FY2019-20. Regulatory frameworks on CG in
India provide institutional stability for stakeholders and investors, which is evident
with the increase in the number of listed firms in the stock market and rise in firms
raising capital through the sale of shares (equity capital). With such frameworks on
one hand, the influence of macro shocks and the instability that it causes on firm CG
performances is depicted using a model. It can be seen that negative macroeconomic
shocks lower debt-funded firm performance in India and there is a need for positive
stimulus to increase firm performance and back to its equilibrium trajectory.
Keywords Corporate governance · Macroeconomic shocks · Corporate debt ·

Policy
JEL Codes: F34, M21, M48
E. Avinash ()
Collegium of World Economy (KGŚ), SGH Warsaw School of Economics, Warsaw, Poland
e-mail: ae80008@doktorant.sgh.waw.pl
https://doi.org/10.1007/978-3-030-63970-9_31
446 E. Avinash
1 Introduction
Firm performances and its stakeholders are one facet of the macroeconomic output
of a country. With the advent of rapid growth, the correlation between corporate gov-
ernance and macroeconomic performance has led to obsessive rumination among
economists. Firms adopt several strategies to maximize output, thereby contributing
to the aggregate fiscal environment of a country. The reverse causation being, the
macroeconomic performance of a country influences the firm performance, more
specifically its corporate governance (CG).
This chapter highlights the latter part of the above argument concerning the
Indian economy, i.e., the fiscal government regulations effect firm performance.
India is a country that has shown potential for rapid growth, post its 1991 economic
liberalization reforms. Annual Gross Domestic Product (GDP) growth rates1 of
8.49% in 2010 and 8.17% in 2016 are evidences of its macroeconomic strength,
albeit potentials of better growth rate. Yet, the political instability in its governance
structure induces reservations and unease among investors who largely contribute to
CG performances of firms.
Exclusive institutional policies, unlike inclusivity that bestows equal opportuni-
ties over resources and services, undermine the economy. Brute nationalism and fear
are no catalysts for economic progress. With such form of governance on one side,
institutional frameworks and regulatory enactments provide directives for firms’
managers and the board, thereby ensuring accountability to capital providers.
Following the demonetization episode and the flawed Goods and Services Tax
(GST) reforms implementation from 2016 and the latter half of the decade, firms
and stakeholders are unsure of where to make their next investment moves. What do
investors do when frequent macro shocks prevail? Their incentives are to play the
waiting game or pull their money out en masse and investing somewhere else. Both
lead to distress, at least in the short run, especially for foreign investors who make
short-term loans. Debts and liabilities play a crucial role in firms’ growth strategies.
A firm raises capital to finance its short-term goals and long-term vision.
To show evidences of all the above, the following sections progress as follows. It
reviews the literature first, on firm performances with regard to investors along with
macroeconomic institutions and their behavioral framework. In the next section, it
examines a model with CG performance to macro shock taking into account two
kinds; a positive and a negative shock triggered in India. The fourth section depicts
an empirical analysis of the model shown in the third section followed by results
of the observation from the empirical tests. And the conclusion follows in the last
section.
1 Source: World Bank national accounts data and OECD National Accounts data files.
Firm Performances and the Onset of Shocks in India 447
Table 1 Theoretical literature evidences

Authors Main factors Economy/period Main findings
Investors and ownership on firm performance
Johnson, Enforceability Countries 25; Relationship between the stock market
Boone, Breach, of contracts; 1997–1998 and exchange rate depreciation with that
and Friedman shareholder of investor protection. Countries with
(2000) rights; macro weak firm performance result in
measures on expropriation by managers, thereby
foreign debt; leading to a drop in asset prices
current account
and reserves
Himmelberg, Annual Countries 38; Company insiders holding higher
Hubbard, and firm-level data; Firms over fractions of equity capital are subject to
Love (2004) capital stock; 6000; high levels of idiosyncratic risk. Lack of
sales-to-capital 1988–1998 investor protection forces insiders to
ratio; hold such fractions. So, there is a
idiosyncratic positive relationship between insider
stock returns; equity ownership and marginal returns
closely-held- of capital
shares
Gompers, Ishii, Governance Total firms Governance index has a monotonic
and Metrick index; firm 1500; relationship with returns. Firms with
(2003) value; profits; 1990–1999 stronger shareholder rights had higher
capital firm value, higher profits, higher sales
expenditure; growth, and lower capital expenditures
dictatorship and made fewer corporate acquisitions
portfolio;
democracy
portfolio;
shareholder
rights
Acharya, Outside equity; N/A Model created to show the maintenance
Myers, and investment and of balance between the internal and
Rajan (2011) payout; initial external governance of firms.
public offering; Self-serving actions of top management
external are limited by the potential reaction
governance functions of subordinates. With scarce
and rents capital that is allocated based on
detailed information availability,
employees of financial firms are
immobile
Hřebíček, Performance Country 1 Analysis of economic, corporate, and
Soukopová, evaluation; (Czech CG sustainability performances of firms
Štencl, and ESG factors, Republic) in the Czech Republic. Utilization of
Trenz (2014) key ICT and identification of KPIs are
performance crucial requirements of firm
indicators, performances and investors
sustainability
reporting
(continued)
448 E. Avinash
Table 1 (continued)
Institutional influences on firms’ performance
Bryan, Nash, Compensation Countries 43; Firms of equity-oriented capital market
and Patel contracts; Firms 317; countries with strong shareholder rights
(2002) agency costs of 1996–2000 tend to use more equity in
debt and compensation. Firms in these countries
equity; market with higher growth opportunities use
developments; more equity driving growth
enforceability
of contracts
Khanna, CG ratings; Developing Globalization is not strong enough for
Kogan, and scandals in and European local vested interests on CG standards.
Palepu (2002) India (CLSAa countries 37 It may have induced the adoption of CG
database); standards, but there is little evidence that
Regressors at these standards are followed
country level;
Regressors at
firm level
Denis and Legal N/A Impact of differing legal systems on the
McConnell protection; structure of CG across countries other
(2003) economic than the USA. Equity ownership
growth; structure protected by strong investor
convergence in rights has a strong relation to firm
CG systems performance of countries other than the
USA
Wang (2014) Interest rate; Country 1 Key macro and CG factors that affect
consumer price (Taiwan); the firm value of Taiwan’s green
index; TCRI 2001–2012 technology industry. Consumer price
credit rating; index and interest rates positively
director and related to stock price
foreign
investor stock
holding rate;
board size
Structural reforms that direct firm performance
Reed (2002) Business N/A Framework for adopting the need for
ethics; CG reforms in developing countries is
development crucial. In adopting the
ethics; Anglo-American model of governance,
responsible the challenges for developing countries
ownership; come with a detailed overview of
nature of concerns relating to growth,
investment; employment, risk, and uncompromising
maintaining on traditional development goals
competition
Singh and Share N/A Differences of arguments on US-based
Zammit (2006) ownership; business model versus Asian way of
crony running businesses post the Asian
capitalism; economic crisis. In sum, a reformed
pricing in the Asian model that allows government
stock market policies and firms to work in liaison,
along with extensions to labor is
sufficient for better economic
development
(continued)
Table 1 (continued)
Enriques and Internal Countries 5 CG framework in the USA vis-à-vis CG
Volpin (2007) governance; (FR, IT, DE, in the EU countries. They differ greatly
empower UK, USA) in terms of shareholders controlling,
shareholders; wherein American firms are widely
disclosure held. Reforms on empowering minority
requirements; shareholders have strengthened internal
public governance in firms
enforcement
Dharmapala Clause 49; Country 1 Reforms with severe penalties on
and Khanna book value of (India); Firms framework violation cause positive
(2012) debt; preferred over 4000; causal effect of CG performance
stock; book 1998–2006
value of assets;
common stock
(market value)
Kota and CEO duality, Country 1 Relationship between CEO duality and
Tomar (2010) audit (India); Firms firm performance. Presence of a small
committees, 106; board has a positive influence on overall
Tobin’s q, risk 2005–2007 firm value
management
frameworks
Source: Author’s literature review
a Formerly Credit Lyonnais Securities Asia (CLSA), is a capital markets and investment group
headquartered in Hong Kong, focusing on financial services of corporate and institutional clients
around the world
2 Literature Review
This chapter highlights some of the key research findings that have documented
works on CG performance and reforms that govern the efficient functioning of
firms. Table 1 gives information on main findings from each resource material that
are organized under (1) investor and ownership relations on firm performance, (2)
institutional influences on firm performance, and (3) structural reforms that direct
firms’ efficient functioning. The collection of papers is from both applied economic
studies and important empirical analyses by notable economists and researchers in
their respective fields.
Theory on investors and ownership on firm performance shows the behavior
of stakeholders’ inter-alia board of directors, managers, and investors, on the
effective functioning of the firm. A common viewpoint leads to the observation that
having strong shareholder rights and identification of key indicators leads to higher
performances of firms.
As of institutional influences on firms, the effects of firm performances before
and after the implementation of institutional frameworks are recorded. It is evident
that they effect positive economic outputs after the implementation of such frame-
works. That highlights the need on reforms that provide framework for efficient
450 E. Avinash
utilization of resources and capital. However, albeit having such frameworks, firms
alter balance sheets to show higher profitability even under scrutinized lower
performances to keep up the same levels of investor equity.
3 Model: Firm Performances Under Macro Shocks
We assume that the CG performance and fiscal institutional frameworks are

complementary to each other. That is, with better regulatory frameworks come better
firm performances. Figure 1 below shows a model in which firms and stakeholders
play under varying economic conditions.
Point E gives the equilibrium position of CG performance C∗ operating within
the current fiscal framework conditions. Firm performances are affected not only
by the policy decisions directed by the board and respective managers but also
governed by its investors and stakeholders who provide equity. So, a change in fiscal
policy reforms effect not only the firm but also its stakeholders. Therefore, at current
instance in the economy, we assume the reaction functions (or profit-maximizing
best fit line) of the firm and its stakeholders to be along Rf and Rs , respectively.
They are positively sloped, i.e., we assume firms perform well under better
macroeconomic conditions and stable fiscal consolidation frameworks. And because
Performance
CG (C)
Fiscal framework (F)
Fig. 1 CG performance on fiscal framework quality. Source: Author’s depiction

of stable conditions, investors (both domestic and foreign) bring in more capital.
Thus, the positively sloped reaction function of stakeholders. The point where the
two reaction functions meet becomes the equilibrium position denoting the ideal
conditions of firm performance under a stable fiscal framework.
3.1 Onset of Macroeconomic Shock
Under such a stable condition, when the economy experiences a sudden shock
through fiscal amendments, the reaction functions experience a shift from their
equilibrium position. As mentioned at the beginning of this chapter, the latter half of
the decade in India post the global financial crisis has seen a significant number of
macro shocks in the economy, causing it economically and institutionally unstable.
A brief description of the impact of these shocks would be ideal to come back
to the CG performances under such unstable conditions. On November 08, 2016,
the Government of India announced a demonetization exercise declaring overnight
that the INR 500/- and INR 1000/- currency notes would no longer be legal tenders
for transactions. The resultant events that followed, caused complete chaos to the
economy, especially the unorganized sector of the country.
Figure 2 shows the stock performances of two of India’s broad benchmark-based
stock market indices, namely the NSE: NIFTY and the BSE SENSEX that often
gauge the overall economic climate. The grey zone in the figure highlights the
31000 9900
Period of Demonetization exercise
30000
S&P BSE SENSEX 9400
29000
NIFTY 50
28000 8900
27000
8400
26000
25000 7900
24000
7400
23000
22000 6900
1-Apr-16
1-Dec-16
1-Apr-17
1-Oct-16
1-Jan-16
1-Mar-16
1-May-16
1-Nov-16
1-Jan-17
1-Mar-17
1-May-17
1-Jul-16
1-Aug-16
1-Feb-16
1-Sep-16
1-Jun-16
1-Feb-17
Fig. 2 Stock market indices during the demonetization shock. Source: Author’s depiction via
TradingView panel. Period: Feb 2016–May 2017
452 E. Avinash
period during which the demonetization exercise was executed. While this chapter
does not go into the details of the episode, it was clear that the damage caused to
the overall economic growth was evident by at least 2–3% points less (Chodorow-
Reich, Gopinath, Mishra, & Narayanan, 2019). Following this episode, came the
introduction of the Goods and Services Tax (GST) Act that was passed2 in the Indian
Parliament.
While the tax reforms itself was a welcomed move, its implementation in the
following months was greatly flawed, causing yet another slowdown in economic
activity across the country. The absence of automated checks on tax filings, unver-
ified claims of input credit, and a complex backend system of fiscal monitoring,
all hindered capital flow within the supply chain (Kumar, 2019; Shukla & Kumar,
2019; Taak & Kumar, 2019).
Therefore, it is evident that the demonetization exercise and the GST implemen-
tation were two major headwinds in the latter half of the decade under consideration,
that hindered India’s estimated growth rate. Under such macro shocks, firms and
their supply chains suffer drastic slowdown with regard to their outputs and capital
flow. It poses tougher conditions for the firms’ board albeit maintaining the same
levels of CG standards. Gripped by insecurity, stakeholders and investors pull their
money out of their investment portfolio with regard to the firm (Rajan, 2010). Going
back to Fig. 1, the reaction function of stakeholders shifts downward taking a new
position at R1s . The new equilibrium position is now at E1 , implying forcing CG
performance to shift from C∗ to C1E .
With lower capital flow and overall instability in the economy, firms’ directors
and managers play either the waiting game or shift investments to other markets
(Rajan, 2010). Therefore, there is a drop in the reaction function of firms and so Rf
shifts leftward to a new position R1f . This new reaction function intersects R1s leading
to a new equilibrium position post macro shock, referred by point E11 . Therefore,
at this stage, both economy and CG standards are even lower than before, at F11 E
and C11E respectively. This is a highly prevalent case in most firms where Bernanke,
Campbell, Friedman, and Summers (1988) discuss in their seminal work on macro
shocks’ impact on corporate debt in firm performances.
3.2 Fiscal Stimulus and Reforms
Whenever such turbulences occur as discussed above, governments or institutional

agencies take necessary actions that stimulate the economy back to its growth path.
This is accomplished by using a series of combinations in monetary or fiscal policy
changes that initiate projects or enact policies that boost firm performances in an
effort to spur investment and boost growth.
2 The GST Act was passed in the Indian Parliament on March 29, 2017 and came into effect from
July 1, 2017. It is a comprehensive, destination-based tax that is levied on every value added.
12500
41000
12000
40000
11500
39000
11000
38000
37000 10500
Tax reforms Sept 20, 2019
36000 S&P BSE SENSEX 10000
NIFTY 50
35000 9500
Fig. 3 Stock market indices during post corporate tax cut reforms. Source: Author’s depiction via
TradingView panel. Period: Jan 2019–Dec 2019
One such policy aimed at rekindling growth was the introduction of the corporate
tax cut reforms by the Government of India on September 20, 2019. Figure 3 depicts
the stock market performance of NSE: NIFTY and BSE SENSEX in 2019. Under
the slate of reforms announced on September 20, 2019, the government lowered its
corporate tax rate from 30 to 22% for firms that do not seek exemptions. And firms
that do seek exemptions would see their tax rate cut from 35 to 25% tax slab. The
reforms saw a welcome move as investors hoped that lowering taxes would boost
corporate profits. This can be seen in Fig. 3 with NSE: NIFTY and SENSEX indices
bagging the biggest single day gain within the period considered.
Going back to the model shown in Fig. 1, with the introduction of fiscal reforms
aimed at boosting productivity, directors of the board are motivated to increase CG
performance that enables better incentives to implement their directions of growth
strategy. This can be corroborated with the rightward shift of the R1f (reaction
function of the firm) and therefore the equilibrium position is back to E1 .
With the introduction of reforms, investors are assured of no or low worry in
stock market volatility. Therefore, their incentives for investing in the firm are higher
than the incentives to abandon the firm. In Fig. 3, this can be noticed with the
rise of NSE: NIFTY and SENSEX curves immediately after the announcement
of the corporate tax cut reforms on September 20, 2019. And, in the model, this
is corroborated by an upward shift in R1s to Rs . This new reaction function will be
intersecting the firm’s reaction function at E12 that motivates firms to have increased
CG performance which in this case, will be attributed to C12 E .
454 E. Avinash
Therefore, it can be seen that the macroeconomic volatility affects CG per-

formance to a greater extent. As what Keynesian economists argue, government
interventions are needed to rekindle the growth in firms by inducing productivity-
enhancing fiscal reforms.
4 Empirical Test
One of those proxies that depict firm performances could be attributed to financing
debts. The firm’s total indebtedness change year-on-year gives a good picture of its
overall performance. We create a model to show how the total indebtedness of a
firm is affected by structural macroeconomic shock. And so, data is collected from
the S&P BSE SENSEX companies listed in the Bombay Stock Exchange in India.
About 30 companies make the list and data is collected from each of the financial
statements published every year from FY2013–14 to FY2019–20 providing 210
observations. Data for one firm (Nestle India Ltd) was missing for the financial years
starting from FY2016–17 to FY2019–20. And so, instead of 210 observations, we
are left with 206 observations. Table 2 shows the list of the variables collected.
Given the above variables, a pooled estimation regression is carried out that
involves the cross-sectional and time series data of the 30 listed companies. The
empirical model takes the form as in (1):
Debti.t = αi + β1 RVnui,t + β2 PrBTxi,t + β3 Taxi,t + β4 EQtyi,t + β5 Cashi,t

+ β6 DeMOi,t + β7 TaxCuti,t + εi,t
(1)
where Debti. t represents the total indebtedness of firm i over that financial year
t. debti, t is the indebtedness change from the current year t to its previous year,
i.e., (t − 1). RVnui, t is the total revenue of the firm i at time t expressed in rupees
crores. The total revenue might only give an overall outlook and so PrBTxi, t is
another variable that shows only profit of the company i in year t; however, before
Table 2 List of variables in Notation Variable name Value (units)

the model
debti, t Indebtedness change INR (in crores)
RVnui, t Total revenue INR (in crores)
Debti, t Total indebtedness INR (in crores)
PrBTxi, t Profit before tax INR (in crores)
Taxi, t Tax expense INR (in crores)
EQtyi, t Equity share capital INR (in crores)
Cashi, t Cash on hand INR (in crores)
DeMOt Demonetization dummy Binary
TaxCutt Tax cut dummy Binary
taxes. Taxi, t is the total corporate tax expense that is accounted for the financial year
t. EQtyi, t is the total equity share capital, which included shareholder capital for that
firm i in that financial year t. The Cashi, t is the total liquid cash in hand of firm i
at time t. This variable is considered to show the effect of demonetization shock to
that of CG performance DeMOt and TaxCutt are dummy variables representing the
demonetization shock and corporate tax cut reforms. DeMOt = 1 for FY2016–17
and 0 for others. TaxCutt = 1 for FY2019–20 and 0 for others.
The methodology for the pooled estimation regression involves the Fixed effects
model (FEM) and the Random effects model (REM) and later employs the Hausman
test to verify the suitability of the model.3 The reason this methodology was
employed is because it provides numerous data observations to aggregate cross-
sectional and time series data that gives a robust econometric estimate. The two
models take the form as below:
Fixed Effects (FE) Model:

K
Yit = αi + βk Xkit + εit (2)
k=1
Random Effects (RE) Model:

K
Yit = (α0 + μi ) + βk Xkit + εit (3)
k=1
where i = 1, . . . N and t = 1, . . . T. N and T represent the cross-sectional and

time series dimensions of the panel dataset. Xkit is the explanatory variable and
Yit is the dependent variable. α i represent the individual effects when fixed, while
(α 0 + μi ) represent the same when random and exhibit normal distribution. FE
Model constants are fixed, and so the εit term is identical and independent. But the
RE Model constants are random and so it does not have to be the case that εit term is
identical and independent. We then use the Hausman test to judge the applicability
of either the FE Model or the RE Model.
5 Results
The findings of the regression estimation are shown in Table 3. The Hausman test
shows the FE Model provides the greatest explanatory power in determining the
3 The behavior of individual firms can be estimated by using the Differential Slope Estimation
technique to investigate the β k coefficients of the FE Model and the RE Model; however, it is
beyond the scope of our objective in this chapter.
456 E. Avinash
Table 3 Regression estimation results of the dependent variable

FE model RE model
Explanatory variable Coefficient t-statistic Coefficient t-statistic
89.357* 0.88 81.965* 1.01
RVnui, t 0.009*** −12.77 0.008*** −12.27
PrBTxi, t 0.237** −2.04 0.211** −2.1
Taxi, t −0.369** 2.41 −0.343* 2.38
EQtyi, t 0.021 −2.73 0.017 −2.71
Cashi, t 0.499* 1.28 0.424* 1.15
DeMOt −33.512** −3.01 −31.787** −2.69
TaxCutt 250.845 2.35 234.988 2.27
Included observations 206 206
R2 0.651 0.535
Adjusted R2 0.632 0.517
Akaike info criterion 20.7 –
Schwarz criterion 20.89 –
F-statistic 37.80***(0.000) 59.44***(0.000)
Hausman test x2 (7) 63.56***(0.000)
Note: Dependent variable is the total indebtedness. The FE Model has the greatest explanatory
power. *significant at 10% level; **significant at 5% level; ***significant at 1% level
regression estimates. The model is dependable, for the R2 and adjusted R2 are
significantly higher at 65% and 63%, respectively.
We notice that the total revenue is positively correlated to that of the indebtedness
level of the firm. The higher the revenue, the higher is also its debt levels. And so is
the variable Profit before Tax PrBTxi, t with Taxi, t variable being, negative. Notice
that with Cashi, t the variable is positive and the DeMOt dummy variable is negative.
It shows that the demonetization shock negatively influenced the debt levels (firms
acquire higher debts). While the TaxCutt variable is positive, it sets a stimulus signal
in the economy and as a result debt is liquidated alongside higher revenues and
higher profits.
We could estimate and gauge the behavior of individual firms by using the
Differential Slope Estimation technique to investigate the β k coefficients of the
FE Model and the RE Model in (2) and (3); however, it is beyond the scope of
our objective. The empirical results validate the model depicted in Sect. 4 of this
chapter. With negative shocks come turbulent CG performance and a stimulus is
required to bring it back close to its equilibrium. Nevertheless, these reforms can
only provide stimulus in order to facilitate the firms to regain growth trajectories
from economic volatility. It is in the hands of the top management, that evaluate
strategies of employing the reforms that governments introduce.
6 Conclusion
This chapter showed the interactions of macroeconomic shocks and CG perfor-

mances across firms in India. Most of the key frameworks that were introduced were
in line with global CG practices. However, the latter half of the decade saw reforms
that ended up down turning the growth trajectories making companies and ease
of doing business, stressful. That includes the introduction of the demonetization
policies and the poor implementation of goods and services tax reforms that were to
bring positive impact on the economy.
This chapter also illustrated the influences of macroeconomic shocks on CG
performances using a model. It highlighted the effective business notion of firm
performances when the economy experiences sudden shocks and the impact it
creates on core business functions that effect stakeholder relations. It was noted that
with negative macroeconomic shocks, the CG performance of firms decreases from
its equilibrium operating position, and with reforms that are brought in to change
the course of lower CG performances, only causes an increase in CG performance;
however not higher than its initial equilibrium position at least in the short run. This
affects investor sentiments and with frequent shocks, there is instability in the firms’
equity and investment decisions.
An empirical relationship was also established showing the influences of external
shocks on debt performances of corporate firms in India. The effects of demoneti-
zation dummy in the regression equation being negative shows that the firms’ debt
levels increased with that of the shock. It is noted that the demonetization episode
was a cash liquidity shock. However, a positive stimulus, such as the corporate tax
cut reform introduced, raises debt-fueled productivity. From both the above cases,
it is evident that the firm performance is dependent not only on its stakeholders
but also on external macroeconomic variations. Therefore, firms either increasing
their investment (and thereby their productivity) or to play the waiting game to be
convinced of the overall stability in the economy.
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Filter or No Filter? An Instagram View
on Modern Visual Culture
Aikaterini Stavrianea, Evangelia Besleme, and Irene (Eirini) Kamenidou
Abstract In the last decades, visual culture has been the focus of intense research
and academic discussion. In addition, social media play a crucial role and influence
modern societies and culture, and among them, Instagram holds a prominent role.
This chapter presents the outcome of research regarding the perceptions of Greeks
towards the impact of Instagram on visual culture, as well as gender and age effects
on the use of the platform’s filters. Statistical analysis is employed to examine
the hypothesized effects. Implications for marketers and content developers are
discussed.
Keywords Visual culture · Visual communication · Instagram · Filters ·

Gender · Age · Marketing communication · Consumer behavior
JEL codes: M31, M37, M39
1 Introduction
The twenty first century is characterized as the century of image and information,
while the fundamental structures of communication have changed radically (Pap-
athanasopoulos, 2000; Papathanasopoulos et al., 2013). The rise of social media has
put visual material at the center of marketing and communication practices as never
before (Stavrianea & Kavoura, 2015). This modernization of the media aligns with
A. Stavrianea () · E. Besleme

Department of Communication and Media Studies, National and Kapodistrian University of
Athens, Athens, Greece
e-mail: aikstavria@media.uoa.gr
I. (Eirini) Kamenidou
Department of Management Science and Technology, School of Business and Economics,
International Hellenic University, Agios Loukas, Kavala, Greece
e-mail: rkam@mst.ihu.gr
https://doi.org/10.1007/978-3-030-63970-9_32
460 A. Stavrianea et al.
the modernization of society, as stated by Papathanasopoulos (2000). In this era,

visual culture has been the focus of academic interest but is still a complex topic.
Visual culture refers to the visible (Becker, 2017) and is associated with social and
cultural conditions. Image and social media hold a prominent role in this media
landscape and influence visual culture.
In this context, Instagram—the online platform that was founded in 2010 has
a dominant position. Instagram is based on image and visual material—users
post visual and audio-visual material on their profiles (Hochman & Schwartz,
2012). Instagram influences modern societies in various ways and, undoubtedly,
has an impact on modern visual culture as well (Cara, 2019), and especially,
on one aspect of visual culture, esthetics which refers to the way an image is
perceived (Jamieson, 2007). Instagram has gained popularity from a very early
age, which tends to grow daily to this day (Instagram Info Center, 2019; Ross
& Zappavigna, 2019; Statista, 2019; Van Halderen & Turut, 2013). As a result
of the success of the platform, Instagram is of great interest to the majority of
marketing and communication managers (Business of Apps, 2019; Parveen, Jaafar,
& Ainin, 2015). Previous research has examined Instagram’s impact on modern
social structures, personal expression, and users’ self-esteem (Cornet, Cafaro, Hall,
& Brady, 2017; Manikonda, Venkatesan, Kambhampati, & Li, 2015). However,
further research is needed to determine the impact of Instagram on the formation
of users’ visual culture, which is an understudied subject (Howells & Negreiros,
2019). User characteristics and specifically age and gender have been studied
extensively regarding different aspects of Instagram (Kim & Kim, 2019; Shane-
Simpson, Manago, Gaggi, & Gillespie-Lynch, 2018; Thelwall & Vis, 2017), but
further study is needed on the relationships between age, gender, and Instagram
filters use.
Thus, the following research questions arose:
RQ1: What are the beliefs of Greek users related to Instagram’s influence on their
esthetics?
RQ2: Does gender affect the use of Instagram filters?
RQ3: Does age affect the use of Instagram filters?
The current study examines the impact of Instagram on the visual culture
of Greek users. Additionally, it examines the dependence of one visual tool of
Instagram, the use of filters, with age and gender. This chapter is structured as
follows. First, the theoretical framework and previous research in the field are
presented. Second, the methodology and results are addressed, and, finally, the
implication and future research directions are discussed.
2 Literature Review
In the last decades, visual culture has been the focus of intense research from
different scientific fields and perspectives such as media and communication studies,
Filter or No Filter? An Instagram View on Modern Visual Culture 461
anthropology, and medicine (Mitchell, 1994). Besides the high interest, though,
visual culture remains an area of high complexity, and there is an extensive dialogue
on this topic. Becker (2017, p. 151) supported the need for a more in-depth study
of visual culture, emphasizing that although the object of visual culture is “the
things that are seen,” what is interesting is that this definition provides visuality
with the characteristic of social interaction. The visible derives from various social
and cultural needs that make the conditions for a specific phenomenon able to be
seen by other individuals (Becker, 2017).
Undoubtfully, the concept of visual culture is broad, with many definitions and
approaches by the researchers. Mirzoeff (1998, p. 3) defined visual culture as
“any visual event that provides information, meaning, or pleasure when the viewer
comes into contact with visual technology, which is designed to improve physical
vision. The visual culture is interested in the sense of sight and its role in the
production of meanings, the formation of esthetic values of social stereotypes, and
social relations.” In essence, Mirzoeff’s definition also adds to the visual culture the
aspect of social interaction and describes it as the relationship between vision and
knowledge.
Closely related to the visual culture is the concept of visual literacy, which is
of the utmost importance in an era where the image is dominant. Kress and Van
Leeuwen (2001) used the term “the grammar” of a visual text and argued that
the visual medium is a fully developed means of communication. That means a
visual text has its own grammar and rules precisely as the language. Similarly,
Debes (1969) argued that visual writing requires a form of literacy, which is
related to the visible. Vermeersch and Vandenbroucke (2015) enrich Debes’ (1969)
definition and argue that visual literacy presupposes the existence of a skill. An
individual is capable of being educated and become visually literate. Although
frequent viewing of images can develop a person’s perceptual and spiritual abilities,
visual literacy acquisition can only be achieved through continuous training. Visual
literacy requires time, special exposure, and teaching (Yenawine, 2016). Becoming
a visually acknowledged person does not require merely the capacity to read a visual
text but also the ability to create it (Wileman, 1993).
When it comes to images, what matters most is not only the way they appear
but the way they are interpreted by the viewers (Sifaki, 2015). The complexity and
interest of visual texts stem from the fact that not all images are interpreted in the
same way and with the same ease. In a diverse and multicultural world, not all
people and societies have the same perspective. In this context, Goldman (1975,
p. 107) supports the idea of a “world-perspective,” that is, “a mixture of ideas,
ambitions, and emotions.” In addition, Goldman (1975) emphasizes that a specific
world-perspective is common only to a particular group of individuals. No cultural
text should characterize a society, apart from the specific social group that created it
and shares a common world-perspective (Howells & Negreiros, 2019).
In recent years, social media play a crucial role and influences modern societies
and culture. In a crowded social media environment, image plays a prominent role
in shaping contemporary visual culture and marketing communication. Instagram is
the free online social networking and photo and video sharing platform that allows
users to take photos and videos and share them on social networking platforms (e.g.,
Facebook, Twitter, Tumblr, and Flickr). This form of social media influences visual
culture through the factor of esthetics, the framing of images, the filters, and various
trends of the platform (Leaver, Highfield, & Abidin, 2020).
A dimension of visual culture is esthetics, which refers to the way in which
an individual perceives an image and consists of cultural influences, personal
preferences, and the subconscious (Jamieson, 2007). In this context, the way the
visual material is placed and the surroundings of the image have an effect on the
esthetics of the user (Mesquita, Barrett, & Smith, 2010). In addition, Instagram
has specific characteristics that enhance the communication of the visual material
and can influence a person’s esthetics. Each user’s profile is structured in such a
way that one image stands next to the other, creating connections, associations,
and narratives. Altering the surroundings of a photograph can change its meaning.
Therefore, the content surrounding a picture can weaken or augment the impact of
a picture (Manovich, 2016).
Regarding the framing of images, Instagram has three typical template forms.
The square frame, which is the most characteristic frame of Instagram, follows the
vertical frame, which, however, does not follow the dimensions of a typical vertical
photo but the application “imposes” its crop. Finally, it is the horizontal frame or
landscape, which does not agree with a typical horizontal photo’s dimensions, but it
also requires a crop. Trimming the original frame of a photo or including the photo
in a frame, creates a new image, a “meta-image.” Similarly, the mass production
of images in specific frame models undoubtedly affects the esthetics of an image
(Bakhshi, Shamma, & Gilbert, 2014; Manovich, 2016).
Besides, Instagram offers a wide variety of filters that allow users to edit the
visual material that they publish. The application’s filters are the same for all users,
and in many of them, such as Clarendon, there is a mass usage (Bakhshi et al., 2014).
Moreover, the photos that depict faces are the ones that tend to gather the most
comments and likes. Bakhshi, Shamma, Kennedy, and Gilbert (2015) examined
the main reasons for using filters. First, the filters are applied to ameliorate the
esthetic of a photograph. Editing the color and the lighting of the photo can affect
its atmosphere. A large number of users believe that black and white filters or sepia
techniques give a vintage esthetic to photography, which is desirable. Moreover, the
editing of the colors of an image, the instantaneous conversion of warm tones to
cold and vice versa, and the creation of separate and more compelling images are
also reasons to use filters. Furthermore, filters increase the user’s interaction with
the image. The visual content that has been edited tends to collect more comments
and likes (Bakhshi et al., 2015).
Finally, through Instagram, trends emerge which are adopted by a large portion
of the population. Minimalism and minimalist photography are trends that have
emerged through Instagram and remain extremely popular nowadays, allowing the
creation of elegant images (Cara, 2019; Manovich, 2016). Recent research in the
field explored the dynamics of Instagram as a marketplace of textual and visual
conversations (Lusch & Jameson, 2018; Schöps, Kogler, & Hemetsberger, 2020).
Other researchers also examined the effects of visual communications on Instagram
users, as well as the influence of digital visual engagement on purchase intention

(Valentini, Romenti, Murtarelli, & Pizzetti, 2018). McFarlane and Samsioe (2020)
show that older in age Instagram influencers contribute to the construction of social
and cultural context via their image and personality. Buschgens, Figueiredo, and
Rahman (2019) supported that visual esthetics in branding foster the creation of
transnational communities.
Nevertheless, research on the impact of Instagram on visual culture is very
scarce, and, to our knowledge, no study exploring gender and age effects on the
use of Instagram filters and trends was found. In order to address these gaps in the
literature, we aim to further understand the effects of Instagram on the formation of
the visual culture, by examining the effects on the esthetics aspect of visual culture
and explore possible relationships between gender, age, and the use of Instagram
filters. Specifically, the current study aims:
1. To explore the beliefs of Greek users relating to Instagram’s influence on their
esthetics.
2. Examine whether gender affects the use of Instagram filters and
3. Understand whether age affects the use of Instagram filters.
3 Methodology
A questionnaire that measured Instagram use and perceptions of users towards

visual culture were designed especially for this research based on previous studies
(Bakhshi et al., 2015; Cara, 2019; Jamieson, 2007; Manovich, 2016) and in-
depth interviews. The sampling procedure consisted of a combination of methods,
employing a non-probability sampling method. Specifically, convenience sampling
through a Facebook account with an invitation to acquaintances to participate in
the research as well as snowball sampling and criteria were employed, applying
Stavrianea, Theodosis, and Kamenidou (2020) procedure. The criteria to participate
in the study were to be an Instagram user and not be employed in a digital marketing
agency. The specific sampling procedure was selected due to time and money
limitations. A total of 265 valid questionnaires were collected in a one-month period
in December 2019. In this chapter, the part of the total research that is analyzed
and presented refers to the impact of Instagram on users’ esthetics, rated on a five-
point Likert type scale (1 = not at all to 5 = very much). Data analysis involved
descriptive statistics and chi-square test. For the chi-square, all tests were set at
a = 0.05.
Ethical approval: There are no ethical issues involved in the processing of the
questionnaire data used in the study. The necessary consents have been obtained by
the persons involved and the anonymity of the participants has been secured. All
procedures performed in studies involving human participants were in accordance
with the National and Kapodistrian University of Athens research committee’s
ethical standards and with the 1964 Helsinki declaration and its later amendments
or comparable ethical standards.
4 Result and Discussion
4.1 Sample Demographics
The respondents’ demographic data concerning gender, age, and educational level
are presented in Table 1. Of the 265 respondents, the women were overrepresented
compared to men. Respondents were divided into three age groups: 18–24, 25–34,
and over 35 years old, whereas the 35+ age group was underrepresented. Lastly,
regarding the sample’s educational level, the participants with secondary education
were underrepresented, while the university graduates were overrepresented.
4.2 Instagram’s Influence on User’s Esthetics
In regard to Instagram’s influence on the esthetics of the users (RQ1, objective N.1),
26.8% of the respondents believe that the platform has affected their esthetics in
a moderate way; 24.9% considers that Instagram has not affected their esthetics
at all; and 24.2% believes that it has affected their esthetics a little. 18.5% of the
respondents consider that the platform has affected their esthetics in a great way
and 5.7% believe that their esthetics has been affected very much.
Table 1 Profile of Sample characteristics Frequencies Percentages (%)

participants
Gender
Male 122 46.0
Female 143 54.0
Age
18–24 93 35.0
25–34 102 38.5
35+ 70 26.4
Education
Secondary 24 9.1
Undergraduate students 74 27.9
Graduates 105 39.6
Postgraduates 62 23.4
Source: The authors
4.3 Gender and Age Effects on the Use of Instagram Filters
Based on RQ2/objective N.2 and RQ3/objective N.3, the subsequent hypotheses

were tested:
H1: There is no association between the use of Instagram filters and gender
(a = 0.05).
This hypothesis is presented as follows:
H10= There are no statistically significant differences between men and women
and the use of Instagram filters (a = 0.05).
H11= There are statistically significant differences between men and women and
the use of Instagram filters (a = 0.05).
H2: There is no association between the use of Instagram filters and age (a = 0.05).
This hypothesis is presented as follows:
H10= There are no statistically significant differences between participants’ age
and the use of Instagram filters (a = 0.05).
H11= There are statistically significant differences between participants’ age and
the use of Instagram filters (a = 0.05).
To test the above hypotheses, the chi-square test statistical criterion was used
after meeting the necessary requirements. Results showed that gender affects the
use of Instagram filters (RQ2/objective N.2), since ×2 (1) = 4.116 (p = 0.042).
Thus, the null hypothesis is rejected. Specifically, cross-tabulation tables indicated
that men use Instagram filters less than women. As for the second hypothesis
(RQ3/objective N.3), the results also revealed that age affects the use of Instagram
filters (×2 (2) = 11.697; p = 0.003). Specifically, as the age group grows, there is
less use of the platform’s filters (Table 2).
5 Discussion, Conclusion, and Limitations
This research has a significant contribution to researchers that want to improve

their understanding of the formation of modern visual culture and mainly how it is
influenced by one of the most popular social media, Instagram. Results showed that
the respondents did not seem to believe that their esthetics has been significantly
affected by the platform. These results differentiat from other researchers, i.e.,
Table 2 Results from Hypotheses testing

Hypotheses Decision
H1. There is no association between the use of Instagram filters and gender Reject the hypothesis
H2. There is no association between the use of Instagram filters and age Reject the hypothesis
McFarlane and Samsioe (2020), who supported the impact of Instagram influencers
on the construction of social and cultural context through their aesthetics.
From the statistically significant effects that emerged, it is interesting that the use
of Instagram filters is related to age and gender. As the age group grows, there is
less use of the platform’s filters, while the same goes for men.
These findings contribute significantly to advertisers, marketers, and content cre-
ators who use Instagram as a marketing and communication tool. Since Instagram is
a platform based on visual content, a better understanding of how the users employ
Instagram tools according to age and gender will facilitate a more efficient content
design, a more effective audience targeting, and brand customization. Undoubtfully,
Instagram offers a great variety of tools and knowledge of users’ preferences
according to their age, and gender can provide digital marketers with a critical
advantage.
Despite its significant contribution, the research is also characterized by certain
limitations derived from time and economic factors. First of all, the research
employed a non-probability sampling method. Additionally, the size of the sample is
limited. Future research could use a random sampling procedure and a larger sample
to validate the results further. Also, it would be interesting to explore the influence
of Instagram in the formation of visual culture for other populations. It would be
interesting to see how it affects individuals from different countries and continents,
and also examine the effect of specific forms of images such as selfies (Wagner,
Aguirre, & Sumner, 2016). Despite the limitations, this research remains important
as it enables both researchers and marketers to gain a better understanding of the
impact that Instagram has on contemporary visual culture and also of the impact
that the platform’s tools have on its users in regard to age and gender.
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The Neoclassical Approach for
Measuring Total Factor Productivity:
The Case of the Greek Economy
Thomas Siskou and Nicholas Tsounis
Abstract This chapter examines and measures the source of growth linked with
disembodied technical progress, i.e., total factor productivity growth for the period
2010–2015 for the various sectors of the Greek economy, using data from input–
output tables. This chapter also links technical diffusion with productivity growth
using the measure of total factor productivity (TFP) which can be seen also as a
measure of disembodied in the factors of production technical progress. It was found
that most of the sectors, during the 2010–2015 period had experienced a negative
TFP change; out of the 64 sectors, 16 present a positive TFP change and 48 negative.
During the examined period, the effects of adjustment program for the public debt
and the incurred recession have influenced both public and private R&D expenditure
affecting TFP change. R&D expenditure has been found to be a determining factor
for TFP change in the Greek economy.
Keywords TFP measurement · TFP change · The Greek economy
JEL Codes: O47
1 Introduction
The relationship between technical change and productivity has attracted consid-
erable attention in the literature; it is thought that technical change is a major
T. Siskou
Department of Economics, University of Western Macedonia, Kozani, Greece
e-mail: tsiskou@uowm.gr
N. Tsounis ()
Laboratory of Applied Economics, Department of Economics, University of Western Macedonia,
Kastoria, Greece
e-mail: ntsounis@uowm.gr; icoae@kastoria.teiwm.gr
https://doi.org/10.1007/978-3-030-63970-9_33
470 T. Siskou and N. Tsounis
driving force behind long-term economic growth for the economy as a whole
and at sectoral level. On one hand, Research and Development (R&D) activity of
firms is a source of technical progress and its productivity benefits are not fully
appropriated by innovating firms but instead diffuse through the rest of the economy.
On the other hand, knowledge produced by research institutions is also diffused
together with embodied technical progress imported from abroad. This technology
diffusion by the three aforementioned channels, to the level that can be absorbed by
a sector, ultimately contributes to rising levels of productivity, standards of living,
and employment in the economy as a whole.
This chapter aims to examine and measure the source of growth linked with
disembodied technical progress, i.e., total factor productivity growth for the period
2010–2015 for various sectors of the Greek economy, using data from input–output
tables. This chapter also links technical diffusion with productivity growth using the
measure of total factor productivity (TFP) which can be seen also as a measure of
disembodied in the factors of production technical progress. This chapter proceeds
as follows: Sect. 2 reviews the literature, Sect. 3 describes the methodology used for
the TFP calculation over the period 2010–2015 in 64 sectors of the Greek economy
and presents the results, and Sect. 4 concludes.
2 Literature Review
This part will review the theory and empirical literature relative to growth theory
in his residual TPF. In the first part, we will give a brief historical overview
of the growth theory, concentrating on the neoclassical solovian theory and the
endogenous growth theory and residual of TFP. In the second part, we will give
an overview on the growth accounting framework of the solovian growth as well
as of that of new endogenous growth theory. In the third part, we will present the
main results of the international empirical literature concerning both direction of the
growth theory: neoclassical and endogenous theory, and in the fourth part we will
review the empirical literature concerning Greece.
2.1 A Historical Overview of the Growth Theory
The Growth Theory has a long history and different schools of thoughts have
contributed to the theory in different and manifold ways. Although the theories differ
in many ways, most of them consider TFP as an important part of the growth theory
and this gives the impetus and motivation to understanding his determinants.
The earliest model was that of Harrod–Domar. Both of them taking into
consideration the double nature of the investment as part of demand and part
of production, they were concerned about how far a dynamic economy tend
to a dynamic equilibrium by full employment. Hypothesizing that the income
The Neoclassical Approach for Measuring Total Factor Productivity: The Case. . . 471
determines the investment, they were looking under which conditions the growth
rate of investment in capital will equal that of the saving rate and most of all if
saving and investment rate will equal that of the natural growth rate of the labor.
They concluded that this kind of equilibrium can be obtained in very rare situations,
the so-called golden age by Joan Robinson but most important they saw that if the
economy deviates from the steady state pattern there are no mechanism to bring the
economy back to the equilibrium (Jones, 1993, p. 63; Thirlwall, 2001, p. 159).
This “pessimistic” view of the economy was contradicted by Solow (1957)
and Swan (1956) who developed the neoclassical model where they showed that
an economy independently of starting conditions tends to a dynamic steady state
path. Specially, assuming price flexibility of the production factors and continuous
production function which allow the substitution of the production factors, they
showed that an economy tend always to situation where the saving and investment
rate is equal to the product of growth rate of the labor to the growth rate of the labor
productivity (Jones, 1993, p. 63; Thirlwall, 2001, p. 91). This model has in some
kind revolutionized the growth theory because it showed:
– First that the economy tends to a dynamic equilibrium were all variable grow at
the same rate and second an equal importance and
– That this happens independently of starting position, independently of the
quantities of production factors, which lead to the conclusion that even poor
countries have a chance to a rich better economic position
By the time the academic “society” started to recognize some gaps in this
approach. The assumption about the decreasing returns of capital and the notion
of TFP as residual was particularly disturbing. A new approach of Endogenous
Growth was launched by the seminal work of Robert Lucas (1988) and David
Romer (1986, 1990). They replaced the constant or diminishing returns of the
capital of the solovian type models by the increasing returns of capital giving place
to an endogenous growth without the “obstacles” of the per capita income of the
previous year and by a flexible TFP which can be “fitted” by many external drivers.
This view of endogenous dynamic “revolutionized” the growth theory: the TFP
was not anymore something like “Manna from Heaven,” a “fit-in-all” a residual
but something Endogenous which can be explained through the dynamic of the
economy, the productions factors, and technology.
2.2 The Growth Accounting and Divisia Index Framework
In general, we can state that the solovian type growth theory suffers through
two main problems: First, the fixed coefficient methodology which is used in the
standard production function together with the exogenous growth theory which fails
to capture the relation across countries and time and it contradicts the endogenous
growth. Second, the standard growth account can only estimate the overall effect
driver of economic growth but is unable to identify the specific drivers and channels
Standard Accounting Growth

New Growth Accounting
Inputs Inputs Quantities

Quantities
Capital
Embedded
productivity
Growth Economic
Growth
Labor Embedded
Economic productivity
Growth
Growth
Input Free
productivity
Growth
Fig. 1 Standard growth accounting framework and new accounting growth framework. Source:
Authors
through which the growth can be realized in the economy which can be very
important for policy matters.
On the other side the endogenous growth theory, abandoning the obstacle of
constant coefficient, the constant returns or diminishing returns of the capital,
opened the door to many factors which drive the growth process in the economy,
from economies of scale to technological progress, human capital, and many others
externalities.
Comparing the two theories as it is done in Fig. 1, we can see in the left side of
the picture the traditional neoclassical theory which is based on very simple two-
sided accounting framework based on the inputs of the production and the all-in-
one, all-included TFP factor and on the right side the much needed new accounting
framework which aims to fill up the empty box of TFP, accounting for the effects
on the capital (capital embedded R&D), on the labor (labor embedded R&D), on
growth in general (input free R&D), and on input quantities.
In general, there are two main approaches to measure growth and TFP: the
frontier and the non-frontier approach. The non-frontier or conventional approach
assumes that outputs are efficiently produced on the efficient frontier, where the
frontier approach allows for outputs being produced off the frontier (Frija, Dhebib,
Aw-Hassan, Akroush, & Ibrahim, 2015; Fuglie, Wung, & Ball, 2012).
Both of these approaches are divided into non-parametric and parametric.
Parametric methods are those which impose specific functional forms and employ
econometrics techniques in estimating a production function or a cost function or
profit function where the non-parametric methods are those which does not impose a
specific functional form. A review of the methods and data used by both approaches
is given by Fuglie et al. (2012) and Frija et al. (2015).
2.2.1 Growth Accounting
Growth accounting is usually connected with the work of Solow who uses a simple
accounting framework based on simple tautologies and the Cobb-Douglas function
and is to differentiate from the Index Methods which are not based on concrete
production functions.
The simplest basic production function which used in the growth theory was the
following1
Q = F (K, L, t) (1)
Which states that the output (y) of an economy is a function of capital (K) the
labor (L) and the technical progress (t).
Subject to the following assumption:
(a) technical progress is neutral
(b) markets are perfectly competitive
(c) production function is characterized by constant scale of economies, and
(d) producers are efficient as they maximize the profits
Because technical process is neutral, we can separate the function and we can
rewrite (1) by separating technical progress as following
Q = A(t)F(K, L)
Using the second assumption the price of labor wL and the price of capital wK
will equal their marginal productivity
wL = ∂Q/∂L = A(t)∂F /∂L (2)
wK = ∂Q/∂K = A(t)∂F /∂K (3)
If we define labor elasticity of output as aL = wL L/Q and capital elasticity of

output as aK = wK K/Q then from the third hypothesis we deduct that aL + aK = 1
and wL L + wK K = Q. According to (2) the output growth rate can be defined as
Q̂ = Â + aK K̂ + aL L̂ (4)
Solving A which is defined as A = TFP

TF̂P = Q̂ − aK K̂ + aL L̂ (5)
From this relation, we see that the growth rate of TFP (TF̂P) is the residual that
cannot be explained by the growth rate of K and L. In order to estimate the relation,
1 The following methodology is based on Athanasoglou et al. (2008, p. 21).

we need to know first the capital aK and labor aL elasticities. If we assume that the
production function is of a Cobb-Douglas type, then parameters β and (1 − β) equal
the income shares of capital and of the labor for which, as it is known, because there
exist statistical data we can rewrite the equation (5) as follows
TF̂P = Q̂ − β K̂ − (1 − β) L̂ (6)
2.2.2 Divisia Index
A Divisia index can be defined as a theoretical construct to create index number

series for series-time data on prices and quantities of goods exchanged. It is designed
to incorporate quantity and price changes over time from subcomponents which
are measured in different units (labor hours and equipment in currency). A Divisia
quantity index has a rate of growth equal to a weighted average of rates of growth of
its component quantities. Similarly, a Divisia price index has a rate of growth equal
to a weighted average of rates of growth of its component prices. The weights in
either case are the relative value shares of each component in total value.
Using the above definition, we can construct the Divisia Index for the (6) as
follows (Athanasoglou, Georgiou, & Staikouras, 2008, p. 21).

n
n
TF̂P = βi Π̂i − αj Iˆj
i=1 j =1
where β i = ρ i i /ρ and i = 1 . . . n numbers of outputs

Pi = the price of output Π i
wj = wj Ij /wI and j = 1 . . . m number of inputs
wj = A(t)∂F /∂Ij
Several indexes can be constructed in order to approximate the Divisia Index;

among them are the Tornqvist, the Fisher, the Laspeyer, and the Paashe indices.
In order to define the Divisia Index using one of the four aforementioned indices,
we need to express the output as well as the input with the help of the indices.
The Fisher quantity index is defined as follows:

ln QF = 1/2 ln QL − ln Qp ,
the Tornqvist quantity index is defined as follows:
1
ln QT = βi,t+1 + βi,t ln Πi,t+1 + Πi,t
2
and QL and QP are the Laspeyer and Paashe indices.
This methodology was not accepted without any criticism. Many scholars have
questioned the notion of the TFP as a residuum. In this regard, Lipsey and Carlaw
(2001, p. 3) discern three main positions:
• The first position that holds the changes in TFP measure the rate of technical
change and is referred as the “conventional view.”
• The second position that interprets the TFP measures only the free lunches
of technical change, which are mainly associated with externalities and scale
effects.
• The third position that is skeptical that TFP measures anything useful.
Regarding the measurement of the TFP Griliches (in Lipsey et al. p. 9) outlines
eight issues of concerns: (1) the relevant concept of capital, (2) the measurement
of output, (3) the measurement of inputs, (4) the place of R&D and public infras-
tructure, (5) missing or inappropriate data, (6) weights for indices. (7) theoretical
specifications of relations between inputs, technology, and aggregate production
functions, and (8) aggregation over heterogeneity.
Because at least the traditional accounting framework which is based on simple
solovian assumption is bounded in expressing the richness and the complexity of
the production process growth and the technical progress which accommodate the
growth process we make use of a methodology used by Binley Gong (2020) who
uses a different set of question in order to show the shortcoming of the traditional
solovian methodology and the new direction which has to take a new accounting
framework in order to apply better to endogenous growth theory.
In order to follow the discussion of Gong we express (6) in logarithms and using
indices for countries and time we can rewrite the equation as follows
yi,t = ai,t + βki,t + (1 − β) li,t (7)
where yi, t is the quantity of output, ai, t is the total factor productivity (TFP), ki, t is
the capital stock, and li, t is the quantity of labor all for a country (i) at time (t).
According to (7) then the output change is defined as
Δyi,t = Δai,t + βki,t + (1 − β) Δli,t (8)
where the contribution to change in output yi, t = (yi, t − yi, t − 1 ) comes from the
change in the production factors ki, t = (ki, t − ki, t − 1 ), li, t = (li, t − li, t − 1 )
and the change of the total factor productivity (TFP) ai, t = (ai, t − ai, t − 1 ).
The contributions due to quantity changes in capital and labor are βkit /yit
and (1 − β)lit /yit , respectively, whereas the contribution due to productivity is
α it /yit .
From the above relation, we can see that the driving force of an economy which
is constrained by the production factors is the TFP and this residual is that which
measures the portion of output which is not explained by the input factors.
However, a great body of empirical research is trying to investigate the determi-
nants of TPF or ai, t using a typical TFP determination regression like the following:
ai,t = a + λZi,t (9)
where Z is a vector which entails all the factors that contribute to the growth of
TFP and so the growth of the economy like R&D, trade, and others and λ is a
vector of coefficients that indicate the sign and the magnitude of the effects on the
productivity.
Because in such a framework the contribution of growth is expressed through
the effect on all-in-one TFP, the contribution of growth drivers can be calculated by
λ̂Zi,t /Δyi,t and therefore the researchers pay attention to the factor λ̂ which gives
the effect of the productivity change.
Several authors wanted to “enrich” the traditional accounting method by incor-
porating ideas like that of learning by doing by Arrow (1962), of spillover effects
of other firms by Romer (1986), and of the knowledge which is incorporated in the
capital through the R&D by Griliches (1979). The latter shows this possibility—as
already mentioned—by using a different set of functions which are better suitable
to incorporate external drivers in the accounting framework.
Using (10)
yj,t = aj,t + βkj,t + γ kt + (1 − β) lj,t (10)
where yj,t is the quantity of output, α j,t is the TFP, kj,t is the quantity of capital,
lj,t is the quantity of labor for firm j and for time t, in logarithms, and kt accounts
for the economy-wide capital stock at time t; a γ > 0 shows company’s j positive
spillover. On the other side, factor k can capture Arrows idea about learning by
doing, Lucas (1988) human capital measured by education levels to capture spillover
in cooperation and learning in groups and Griliches (1979, 1992) idea of knowledge
created through R&D and spilled over to the companies. Given the productions
function in the lever of the companies, one can compute the equilibrium wide
economy production function of Barro (1996) as follows:
yi,t = ai,t + (β + γ ) ki,t + (1 − β) lj,t (11)
where the term γ will capture the increasing (γ > 0) or decreasing returns (γ < 0)
of scale taking into account, for example, the impact of the environment and the
negative effects it can have on the growth.
Another important point is the so-called induced innovation or induced technical
progress which can result in the restructuring of the input to a more effective
combination which can be related to the change of relative prices of the production
factors. Hicks pointed to that point when he stated that a change in the relative price
of the production will lead to innovation and invention directed to economize the
relative expensive factor in the production process (Gong, 2020). Equally, changes
in the endowment in the various countries and in various times but as well changes
in the input prices will lead to innovation and inventions and so to variation in
the production structure causing capital and labor share to vary in the production
function. Such change in the production structure can be captured in production

function like the following.
Taking the following production function:
yi,t = ai,t + βi,t ki,t + δi,t li,t (12)
where β it = f1 (Zit ) and δ it = f2 (Zit ). Assuming linear effects of Zit on input

elasticities, which determine the linear relations between growth drivers (e.g., R&D)
and the input elasticities, one can point to the need that δ it must not equal (1 − β it )
due to spillovers introduced in the endogenous growth theory and so to the possible
use of production function without constant elasticities. Assuming a production
function that assumes linear of Zit on elasticities and productivity, the (12) can be
rewritten as follows

yi,t = ao + λZi,t + β0 + ρZi,t ki,t + δ0 + τ Zi,t li,t (13)
where α 0 , β 0 , and δ 0 are the level of TFP, capital elasticity, and labor elasticity when
Z = 0, respectively. λ, ρ, and τ measure the effects of Z on TFP, capital elasticity,
and labor elasticity, respectively. In this way the production function can capture
the change in growth due to the change in the quantities ki,t or li,t and in the quality
which can be captured in the elasticities of the productions factors β it = f1 (Zit ).
On the other side Zit can as well capture the change in the growth and
productivity through international trade as it is stated many time in the theory
as far as international trade can lead to change in resource allocation and input
prices, and therefore affect input elasticities and productivity. It can trace the effect
of structural transformation between agriculture, manufacturing, and services. In
most countries, the manufacturing and service sectors are more productive than the
agriculture sector and therefore the countries can improve their TFP increasing the
share of non-agriculture sectors. Restructuring in the economy can influence the
input elasticities of sectors as each sector has its own technology and its own sector-
specific input elasticities.
The endogenous growth theory accounting framework does not neglect the old
solovian accounting framework and this can be seen if assume constant elasticities
β and in the framework and rewrite the (13) as follows:

yi,t =ao +λZi,t + β0 −β̂ + ρZi,t ki,t + δ0 − δ̂ + τ Zi,t li,t + β̂ki,t + δ̂li,t
(14)
where β̂ and δ̂are estimates of capital and labor elasticities by conventional

production function that assumes constant elasticities. The estimates of TFP change
is

TF̂P = ao + λZi,t + β0 − β̂ + ρZi,t ki,t + δ0 − δ̂ + τ Zi,t li,t (15)
Rearranging the (15) we get

'
TF̂P = λ + ρki,t + τ li,t Zi,t + a0 + β0 − β̂ ki,t + δ0 − δ̂ li,t (16)
When the TFP determination function ai, t = a + λZi, t is used to estimate

the factors of TFP given the (16) then the estimated effect on productivity equals
λ + ρki, t + τ li, t which not only includes the impact on λ but also on the capital
elasticity (ρ) and the labor elasticity (τ ).
When the main purpose is to estimate the overall effects of Z on output, standard
growth accounting applies that Z estimates the impact on productivity and input
elasticities (i.e., λ, ρ, and τ ). At the end, all these factors contribute to the output.
Moreover, because the definition of TFP is the portion of output not explained by the
amounts of inputs used in the production, it is reasonable to account all the residuals
besides input quantities, even input qualities, into TFP.
2.3 The Empirical International Literature
At first, the empirical literature concentrated on the empirical validation of the tra-
ditional solovian growth theory. In this respect, the research seemed to concentrate
on two main questions/problems which puzzled the theory, the convergence thesis
of neoclassical theory and then the deciphering of the nature and the determinants
of the “big unknown” TFP. Most of the researchers concentrated on both problems.
The first earlier wave of studies included the studies of Maddison (1970), Nadiri
(1972), Robinson (1971), and Young (1995).
Maddison (1970) investigated 22 developing countries in the time period between
1950 and 1965. He used a conventional production function. He modified labor
data in order to investigate the contribution of education, health of population, and
movement of rural population to the industrial sector. In general, he found that the
countries he investigated showed a considerable growth and that this growth was
based mainly on high investment in capital which contributed to about 55% of the
growth, while 35% was based on labor, and the rest 10% was based on other factors.
Considering the contribution of human capital, education, health, and movement of
population he found positive effects.
Nadiri (1972) included in his research nearly the same countries as Maddison’s
study but he found that the main driving force of the growth of the countries under
investigation was labor and not capital and this was mainly due to the fact that he
took a higher rate of capital in the production function than Maddison. He also
investigated the contribution of health and education of population on growth and
found positive effects on growth as well.
Young (1995), in a much discussed study, concentrated his attention on four East
Asian countries, Hong Kong, Singapore, South Korea, and Taiwan, trying to explain
their high rate of growth in their economies. He concluded that the higher rates were
mainly a result of higher sectoral disaggregation rather than the result of higher TFP.
The second wave of empirical research took place somehow together with the
seminar works of David Romer (1986, 1990) and Robert Lucas (1988) who marked
the beginning of the new era of endogenous growth theory. After realizing the
dynamics of the endogenous theory to include new elements in explaining the
growth process, the academic society concentrated more on identifying the powers
which drive growth in the economies, somehow filling the black box of the big
unknown, the residual, the TFP. Most of them put forward the question about the
convergence in a second-order, testing the so-called conditional convergence of
neoclassical theory.
The academics apart from including the typical variables like income of previous
years, growth rates of capital and savings, concentrate on investigating R&D as a
driver to impove the growth rate, FDI, international trade, knowledge, education,
schooling a powers to create, to adapt and diffuse innovation.
Robert Barro (1990) investigated the development of the per capita income
of 98 countries for the period of 1960–1985. His main purpose was to test the
relevance of human capital as a driver of growth considering, for example, the
enrolment in the schools and he found that this variable was statistically relevant
in explaining the growth of the per capita income showing a negative β coefficient
which pointed to the conditional convergence. He tested the relevance of human
capital in different geographical areas and he found that the countries in the Pacific
Rim had accumulated higher amounts of human capital in relation to the poor
per capita income that showed higher growth rate of income (Thirlwall, 2001).
Mankiw, Romer, and Weil (1992) investigated three groups of countries between
1960 and 1985, in the first group, they included 98 non oil-producing countries,
in the second they included 76 developing countries, and in the third group, they
included 22 OECD countries. They included human capital in the relation in order to
test its relevance and they found that there was a statistical relevance verifying once
again conditional convergence. Regarding human capital, they modeled the health
of population proxied by life expectancy (log of 80 years minus life expectancy)
and they found statistical relevance in all cases except for the case of the OECD
countries.
The importance of technological progress had been pointed out very early in
theory, for example, in the works of Harrod and Hicks, who tried to decipher the
impact of the technological progress on capital and labor. They invented the neutral
or factor saving technology (Jones, 1993). Hicks on the other side emphasized the
relevance of the relative price changes for the innovation of new combinations
and the invention of new technologies. Nowadays, R&D came into the center of
attention. R&D is a very broad field. It depends on self-business spending and
public spending as well. Public spending can take the form of direct investment
and indirect investment in education, higher education, or financing of research
institutes. It can be related to the inward and outward foreign direct investment.
In general, it encompasses the knowledge which can contribute to innovation, the
process of R&D self (business, public, and higher education), and the channels
through which this innovation is transferred, spilled over, diffused, and adopted.
Nearly all the empirical studies show positive effects on growth and TFP. Abdih and
Joutz (2005) explored, with time series data of the USA, patterns of knowledge in
the production function found a strong long-run relationship between TFP and the
stock of knowledge, proxied by patents and strong intertemporal spillovers. Guellec
and de la Pottier (2001) investigated the long-run relationship between the TFP and
R&D in domestics business, public research (universities), and business research by
other countries and they found a strong relation only for the OECD countries.
Regarding the transmission of R&D between countries, one has to discern
two main channels. The first channel is that of inward and outward FDI. Inward
FDI allows a direct adoption of new knowledge through the import of new
equipment, new products, imitation of foreign products; outward FDI contributes
to the diffusion of new knowledge through economies of scale and contacts. The
second channel includes the trade channel which entails the import of goods which
may incorporate new technologies and can be imitated as well the export channel
which exposes the market and the contacts they can contribute to the exchange
of information. Keller and Yeaple (2003) found positive effects of FDI on firm
level and Griffith, Redding, and Simpson (2003) found a positive effect of FDI
in the manufacturing sector. Coe et al. (Coe & Helpman, 1993; Coe, Helpman,
& Hoffmeister, 1995) found that small open economies usually benefit more from
foreign business R&D than from domestic business R&D. van Pottelsberghe de la
Potterie and Lichtenberg (2001) concluded that the impact of foreign business R&D
is higher in countries where the business R&D intensity is higher. Mayer (2001)
on the other side stated that trade has positive effects on transferring knowledge
throughout the introduction of goods-technology and the adoption of technologies,
while Acemoglou and Zilibott (1999) stated than even the technology is a kind
of public good in the long-run, the adoption, absorption, and the diffusion of
technology has some cost that disturbs the north-south technology transfer.
As far as the differentiations between private and public R&D and their impact
on growth and TFP is concerned, Guellec and de la Pottier (2001) found that both
private and public R&D capital have a significant effect on the level of growth and
TFP. But comparing the efficiency of the private R&D with that of the public R&D,
they came up to the conclusion that public R&D capital has a stronger impact on
growth than private R&D capital.
2.4 The Empirical TFP Findings for Greece
Of great importance for Greece were the empirical performance of growth of the
economy, the productivity, and the technical change in the production process.
Since 1981 Greece participated in the European Union (EU) (European Economic
Community (EEC) at the time) and since 2002 in the European Monetary Union
when adopted the Euro as her own currency and abandoned the Drachma. Therefore,
questions about the convergence of the Greek economy to the core countries of the
EU and EMU, about the growth rates and catching up process to higher developed
countries, about the technological improvements in order to be competitive in a great
market, were in the forefront of the agenda of the Greek economy.
Surely the participation in the EU and the EMU favored Greece in many ways and
Greece experienced high average growth rates of the gross domestic product during
the last 20 years before the outbreak of the Greek debt crisis in 2008, showing an
average growth rate of 2.4% for the 1990s and 4.1% for the years between 2000 and
2007 (Voutsinas & Tsamadias, 2014, p. 635). But still, the question of convergence
to the higher per capita countries, to the technology frontier of the core European
countries was by many researchers questioned.
Mavroudeas and Syriopoulos (1998) using two models in the tradition of the
solovian single-factor model, tested the unconditional and conditional convergence
of Greece to EEC. They concluded that the Greek economy did not exhibit a
convergence in the time period between 1981 and 1996. Concluding, they expressed
their belief that the traditional models that they have used to test the unconditional
and conditional convergence were not suitable for depicting the reality and they need
to be updated using more variables among others of endogenous technical progress.
Contradicting, in some way, the results of the aforementioned researchers,
Vamvakidis (2006) investigate the convergence of Greece to the EU Countries.
He discerns two periods: 1981–1995 where he found that the Greek per capita
income falls from 59% of the level of that of the EU-average to the level of 56%
experiencing a divergence instead of convergence and the second period 1996–2002
where he found that the Greek economy recovered quickly covering ¾ of the lost
ground of the first period. He explains this change in the growth pattern due to
the change to the policies followed by Greece during the participation in the EU and
especially the change in policies regarding fiscal consolidation, decrease of inflation,
and liberalization of the financial, labor, and product markets.
Similarly, Burda and Severgnini (2009) in a study which was aimed more to test
growth and TFP development on the “New European2 ” countries, the “Central and
Eastern European (CEE)” countries to “Old European3 ” Countries for the period
between 1994 and 2004 estimated for Greece the highest average growth rates of
GDP and TFP, 3.5% and 1.8%, respectively among the old European countries
showing the progress made by the Greek economy in the direction of catching up.
Bournakis (2007, 2011) examined the technology transfer from a country like
Germany, which belongs to the technology frontier countries, to Greece which,
even though a member of the EU, is still a periphery country. He did that by
estimating the influence of the German manufacturing sector on the TFP of the
Greek manufacturing sector for the period between 1980 and 2003. He found that
the speed of technology adjustment was too low because of rigidities in the Greek
2 To the New European counties the authors included Denmark, Finland, Ireland, the Netherlands,
Norway, Sweden, and the United Kingdom.
3 To the Old European counties the authors included Austria, Belgium, French, Germany, Greece,
Italy, Portugal, Spain, and Switzerland.

labor and product market, such as the minimum wage and market concentration.
He also found productivity gains from trade but he discovered that their realization
required substantial time lags.
Concentrating on Greece self, Voutsinas and Tsamadias (2014), in a well-
documented study, examined the relation of R&D and the TFP for the Greek
economy, taking into account the Greek innovation system by distinguishing the
impact of private research from public research. They used a VEC model in order
to study the endogeneity of causality and the short- and long-run dynamic of TFP
and R&D. They found the presence of long-run relation between total R&D and
TFP and between public R&D and TFP but they failed to find a long-run relation
between private R&D and TFP, stating in this way the great importance of public
innovation system for Greece. They explain this surprising result through the small
size of the firms (SMEs) and the small collaboration of the SMEs to R&D projects,
the weak connection to academic institutions and other research centers, and the fact
that most research programs are financed through European funds which are mostly
used by academic and other public research institutions.
Pegkas, Staikouras, and Tsamadias (2020a, 2020b) investigated the impact of
R&D capital on TFP and growth in the Eurozone countries for the period between
1995 and 2016 including in this way the Eurozone financial crisis period. They
investigated the impact of foreign and domestic R&D, business R&D, public R&D,
and higher education R&D on TFP and growth for each country. They found that the
crisis hit mostly the peripheral countries revealing in this way their pathologies and
their serious economic problems. As far as the contribution of the R&D capital in the
different countries is concerned, they found that the foreign R&D capital contributed
more than domestic R&D, showing in this way that the small economies which
invest less on R&D may benefit from foreign R&D rather from their own R&D
investment. As far as the contribution of business, public and higher education R&D
is concerning, they found evidence that again the higher education R&D tributed
higher to TFP than the other two.
Having “explored” the relevance of the public innovation at least for the case
of Greece but also in the case of the Eurozone countries, Voutsinas and Tsamadias
(2014) proposed a system which should be applied at least in Europe and which will
help to systematically analyze and evaluate the public innovation systems and help
to identify ways to improve the research and the technology progress and transfer in
Europe.
Katsoulacos and Tsounis (2000) on the other side concentrated their attention
on the contribution of the Knowledge Intensive Business Services (KIBS) to the
productivity growth of the Greek economy. They used for their investigation the
Input–Output relation of the sectors of the Greek economy for the years of 1980
and 1988. They found that the Service Sector gained importance using more KIBS
by replacing labor in many sectors. In stating these results the authors investigated
the role of Information and Communication Technologies (ICTs) as a main KIBS
factor for the whole productivity gain of the economy:
– ICTs increased the role of Business Services to a large number of users

– Business Services play an important role in explaining the rate of growth of TFP
in the Greek economy
Using a Cobb-Douglas and a Constant Elasticity of Substitution (CES) produc-
tion function, the researchers found that the Business Service sector has a direct
effect on growth.
Athanasoglou et al. (2008) investigated the productivity performance of the
Greek banking industry for the time period of 1990–2006. Using a growth account
framework and special methodologies to measure the very fuzzy terms of output and
inputs of the banking industries, they found that, in general, the banking industry
during that period showed a higher rate of growth and TFP than that of the whole
Greek economy and this was due to the major restructuring that the banking sector
had implemented due to the accession of Greece to the monetary union. This
reconstruction was reflected in the involvement of higher qualified personnel and
new technological equipment. Especially, they found that4,5 :
– Bank output and labor productivity increased considerably during the whole
investigating period
– Increase in output and labor productivity was higher than the average growth
output of the Greek GDP and labor productivity and this finding was enhanced
during the second subperiod, between 1998 and 2006
– Capital productivity and TFP in the Greek banking sector improved considerably
since 1999.
Confirming in this way the results of the Chortareas et al. (2008), who conducted
an investigation including 85 commercial banks for the time period between 1998
and 2003 and using a non-parametric DEA Malmquist Index approach found that
the TFP in the banking sector increased by 14.4%.
Belegri-Roboli and Michailidis (2006) estimated TFP change of the whole Greek
economy and its twenty-one (21) sectors separately using a traditional accounting
framework based on a linear regression estimation of the production function of a
type of Cobb-Douglas for the time period from 1988 to1998 and they found:
– That the TFP of most sectors remained constant at a level of about −0.39% for
the investigating period.
– On average the annual rate of growth of output, labor, and capital among sectors
were positive and equal to 2.99%, 4.38%, and 4.11%, respectively.
4 Apergis and Rezitis (2004) using only six individual banks and data from 1983 to 1997, a time
period long before the restructuring wave on the Greek banking industry, found some kind of
different results; they found positive economies of scale but negative TFP effects for the banking
industry.
5 Similarly, Pasiouras and Sifodaskalakis (2007) using only 78 observation of 13 cooperative banks
and data from 2000 to 2005 estimated the TFP using two different models: one that was based on
the intermediation approach and the second that was based on the production approach, they found
decreasing TFP (−3%) for the first and increasing TFP (6.6%) for the second.
– The average annual growth rate in productivity of labor and capital among sectors
were equal to −1.39% and −1.12, respectively.
– The contribution of the technology to growth among sectors was on average 39%.
– Most of the sectors experienced negative change.
3 Methodology for TFP Measurement and Results
As presented in Sect. 2, TFP growth rate in neoclassical economics is residually

determined after subtracting the growth rates of employed factor inputs, weighted
by their income shares, from the output growth rate.
TFP, for a sector or for the economy as a whole, is generally defined as the ratio
of the volume of production Y relative to the total volume of input X, i.e., TFP = X
Y
.
Therefore, the growth rate of TFP is computed as:
˙
TFP Ẏ Ẋ
= − (17)
TFP Y X
where the dot indicates ( change (it can be seen also as the first derivative against
time, i.e., for Y, Ẏ = dY
dt , etc). From (17) it is seen that TFP growth is a residual
between the rate of change in production and the rate of change in production inputs.
TFP change then is calculated as the change in output growth between two
distinct points in time when all the remaining sources of output growth are sub-
tracted. Therefore, we can identify apart from TFP the contribution of primary factor
productivity change in output growth, the contribution of labor, the contribution of
capital, and the contribution of intermediate inputs of domestic and of imported
origin. When examining (17) for several successive points in time, substitution
effects among inputs (intermediate of domestic and imported origin and labor and
capital) can also be identified (see Tsounis, Polychronopoulos, and Plaksiy (2017)
for an application of the above method for the Ukrainian economy).
It is proven that using value-added instead of gross output is a better indication
of resource allocation (Norihisa, Ioannidis, & Papaconstantinou, 1996). Further, the
value-added approach presents a considerable advantage over the Divisia index that
uses inputs of labor and capital because sectoral capital inputs have to be calculated
and this is not an easy task, given the unavailability of reliable sectoral capital stock
data.6 Consequently, the value-added approach will be used for measuring the TFP
change according to the neoclassical approach.
Let
6 Capital stock data is calculated by annual investment data imposing a rate of depreciation (usually
“radioactive” depreciation). However, it is difficult to estimate actual depreciation rates per sector
and the rate of depreciation of a sector may also vary over time.

YjVA = pj Yj − pi Xi − ti Xi − pm Xim (18)
i i i i
be the value-added of sector j at factors cost. Y denotes final product in physical

units, X intermediate inputs in physical units, subscripts denote sectors, superscript
m denotes imports, p denotes price, and t net indirect taxes per unit of product.
Further,
˙ j
TFP ∂Y VA 1 ∂Yj 1 pj Yj
j = j
= TFP = (19)
TFPj ∂T YjVA ∂T Yj YjVA
hatted variable represents percentage change.

j we get:
By totally differentiating (19), substituting (18), and solving for TFP

w i Li ˆ Yj pj pˆj Xi pi
ˆ
j = Y VA
TFP j − Lj − + p̂i
i YjVA YjVA i YjVA
(20)
Xm pm Xi ti
i i ˆm
+ p + tî
i YjVA i i Y VA
j
By substituting in (20) li∗ , yj∗ , xi∗ , m∗i and ti∗ the share of the value of the ith
labor input in value-added of j, the share of value of output j in value-added j, the
share of value of domestic inputs in value-added j, the share of value of imported
inputs in value-added j, and the share of net indirect taxes in value-added j (i.e.,
Xm pm
li∗ = wiVA , yj∗ = jVAj , xi∗ = XiVA
Y p
Li pi
, m∗i = i VAi , ti∗ = XVA
i ti
), respectively we get:
Yj Yj Yj Yj Yj

ˆ
j = Y VA li∗ Lˆj − yj∗ pˆj + xi∗ p̂i + m∗i pîm + t ∗ tî
TFP j − i i i i i
(21)
The results by applying (21) to the input–output table data for 2010 and 2015
of the Greek economy (Hellenic Statistical Authority, 2010–2015) are shown in
Table 1.
From Table 1, out of the 64 sectors, 16 present a positive TFP change and 48
negative. The largest TFP change is recorded in sector 21 transport equipment
followed by chemical products (11) and motor vehicles (20) while the largest
negative change is recorded in Coke and refined petroleum products (10), Mining
and quarrying (4) and Wood and of products of wood and cork, except furniture (7).
Surprisingly, technology-intensive sectors like telecommunication services (39),
Repair services of computers (62), Computer, electronic, and optical products (17),
food products (5), and pharmaceutical products (12) experienced a negative TFP
change.
Further scope of this chapter is to link technical diffusion with productivity
growth using the measure of total factor productivity (TFP) which can be seen also
as a measure of disembodied in the factors of production technical progress. As a
Table 1 Sectoral TFP change over 2010–2015 in the Greek economy (sectors with a negative
change in red)
Sector (j) Description of sectors j
TFP
1 Products of agriculture, hunting, and related services 0.038008
2 Products of forestry, logging, and related services 0.149102
3 Fish and other fishing products; aquaculture products; support −0.057154
services to fishing
4 Mining and quarrying −0.449971
5 Food products, beverages, and tobacco products −0.010806
6 Textiles, wearing apparel, and leather products −0.069123
7 Wood and of products of wood and cork, except furniture; articles of −0.196733
straw and plaiting materials
8 Paper and paper products −0.099872
9 Printing and recording services −0.088408
10 Coke and refined petroleum products −1.406981
11 Chemicals and chemical products 0.292263
12 Basic pharmaceutical products and pharmaceutical preparations −0.154500
13 Rubber and plastics products −0.058416
14 Other nonmetallic mineral products −0.104499
15 Basic metals 0.166686
16 Fabricated metal products, except machinery and equipment −0.068151
17 Computer, electronic, and optical products −0.021717
18 Electrical equipment 0.036765
19 Machinery and equipment n.e.c. −0.026387
20 Motor vehicles, trailers, and semi-trailers 0.174683
21 Other transport equipment 1.023396
22 Furniture; other manufactured goods −0.053979
23 Repair and installation services of machinery and equipment −0.047247
24 Electricity, gas, steam, and air-conditioning −0.134689
25 Natural water; water treatment and supply services −0.018100
26 Sewerage; waste collection, treatment, and disposal activities; −0.008675
materials recovery; remediation activities and other waste
management services
27 Constructions and construction works −0.169205
28 Wholesale and retail trade and repair services of motor vehicles and −0.117502
motorcycles
29 Wholesale trade services, except for motor vehicles and motorcycles −0.060791
30 Retail trade services, except for motor vehicles and motorcycles −0.071518
31 Land transport services and transport services via pipelines −0.115344
32 Water transport services −0.057168
33 Air transport services 0.106078
34 Warehousing and support services for transportation −0.027709
35 Postal and courier services −0.036422
36 Accommodation and food services −0.002063
(continued)
Table 1 (continued)
Sector (j) Description of sectors j
TFP
37 Publishing services −0.066104
38 Motion picture, video and television program production services, −0.142417
sound recording and music publishing; programming and
broadcasting services
39 Telecommunications services −0.087976
40 Computer programming, consultancy, and related services; −0.009674
information services
41 Financial services, except insurance and pension funding −0.105754
42 Insurance, reinsurance, and pension funding services, except 0.041126
compulsory social security
43 Services auxiliary to financial services and insurance services −0.016321
44 Real estate activities without imputed rents 0.010566
45 Imputed rents 0.002934
46 Legal and accounting services; services of head offices; −0.060135
management consulting services
47 Architectural and engineering services; technical testing and −0.106085
analysis services
48 Scientific research and development services 0.032860
49 Advertising and market research services −0.042667
50 Other professional, scientific, and technical services; veterinary −0.076330
services
51 Rental and leasing services 0.029179
52 Employment services 0.136463
53 Travel agency, tour operator, and other reservation services and −0.046284
related services
54 Security and investigation services; services to buildings and −0.015015
landscape; office administrative, office support, and other business
support services
55 Public administration and defense services; compulsory social −0.046905
security services
56 Education services −0.023295
57 Human health services −0.086154
58 Social work services −0.122993
59 Creative, arts and entertainment services; library, archive, museum, −0.028655
and other cultural services; gambling and betting services
60 Sporting services and amusement and recreation services 0.011132
61 Services furnished by membership organizations 0.062832
62 Repair services of computers and personal and household goods −0.053654
63 Other personal services −0.082607
64 Services of households as employers; undifferentiated goods and −0.186933
services produced by households for own use
Table 2 Estimation results of the effects of R&D expenditure on TFP

Dependent Variable: TFP
Method: Least Squares
Date: 06/16/20 Time: 12:26
Sample: 1 64
Included observations: 64
C 0.011386 0.165129 0.068951 0.9453
R_D_2010_15 0.606292 0.221512 2.737061 0.0082
R-squared 0.300453 Mean dependent var −0.220704
Adjusted R-squared 0.240147 S.D. dependent var 1.203995
S.E. of regression 1.049517 Akaike info criterion 3.023597
Sum squared resid 63.88618 Schwarz criterion 3.225992
Log-likelihood −90.75511 Hannan-Quinn criter. 3.103331
F-statistic 4.982164 Durbin-Watson stat 2.120648
Prob(F-statistic) 0.000730
Source: Authors’ estimations
measure of knowledge diffusion, Research and Development (R&D) expenditure

per sector of economic activity has been taken. Total R&D expenditure over the
examined period 2010–2015 has been used as an explanatory variable for the TFP
change. Data on R&D expenditure has been extracted by the OECD database and
it was expressed in million USD, in constant 2010 prices and PPP.7 The estimation
results are the following (Table 2).
The Jarque-Bera normality test was conducted to ensure that the residuals follow
the normal distribution (and therefore, the conference intervals are correct). It
had a value of 153.97 and it was statistically significant at 0% level of statistical
significance. Therefore, the null hypothesis of non-normality is rejected and the
alternative is adopted. Further, the Breusch-Pagan-Godfrey Heteroskedasticity Test
has a value of 0.159, the χ 2 was not statistically significant at least 5% level of
statistical significance and it is concluded that the residuals are homoskedastic.
The coefficient on R&D expenditure is statistically significant at less than 1%,
it has the expected sign and has a value of 0.606 meaning that an additional unit
of R&D expenditure (defined here as millions of USD in constant 2010 prices and
PPP) increases TFP by 0.606%.8
7 PPP: Purchasing Power Parity.

8 Note, that the depended variable is the change in TFP over the 2010–2015 period.
4 Conclusion
This chapter was aiming at examining total factor productivity for the period 2010–
2015 for the various sectors of the Greek economy, using data from input–output
tables. This chapter also provides a link of technical diffusion with productivity
growth using total factor productivity (TFP) which can be seen also as a measure
of disembodied in the factors of production technical progress as a measure of the
latter and sectoral R&D expenditure as a measure of the former.
It was found that most of the sectors, during the 2010–2015 period had
experienced a negative TFP change; out of the 64 sectors, 16 present a positive TFP
change and 48 negative. The largest TFP change is recorded in sector 21 transport
equipment followed by chemical products (11) and motor vehicles (20) while the
largest negative change is recorded in Coke and refined petroleum products (10),
Mining and quarrying (4), and Wood and of products of wood and cork, except
furniture (7). Surprisingly, technology-intensive sectors like telecommunication
services (39), Repair services of computers (62), Computer, electronic, and optical
products (17), food products (5), pharmaceutical products (12) experienced a
negative TFP change.
TFP change is linked with total sectoral R&D expenditure, the derivative of the
function is positive and has a value of 0.606. During the examined period the effects
of adjustment program for the public debt and the incurred recession have influenced
both public and private R&D expenditure affecting TFP change. R&D expenditure
has been found to be a determining factor for TFP change in the Greek economy.
Acknowledgment Financial assistance from research grant 80325 by the Research Committee of
the University of Western Macedonia is gratefully acknowledged.
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Consumers’ Motives for Visiting Social
Media Brand Pages and Social Media
Advertisements
E. Iliopoulou and A. Vlachvei
Abstract The aim of this study is to identify the main factors related to social media
pages, social media content, and social media advertisements that attract consumers
and motivate them to purchase brands. Data were collected using an online survey of
503 questionnaires. Factor analysis on the motives for visiting social media pages
revealed five factors: information, social interaction, entertainment, remuneration,
and contributing activities, while attractive content of social media pages has to
do with Informational content, call to action, challenging content, and entertaining
content. In terms of social media advertising, factor analysis revealed four factors:
interactivity, relevance, performance expectancy, and information.
Keywords Social media motivations · Social media content · Social media

advertisements
1 Introduction
The rapid development of Information and Communication Technologies, espe-

cially the services of the Internet and social media, has led the information,
communication, and markets, in new paths. The so-called Web 2.0, which has
brought great changes in the way users search for information and buy from
the Internet, has led to the development of social media and the steady increase
in its users (Kaplan & Haenlein, 2010). Social media play an important role in
everyday life and have undergone remarkable global expansion and development
(Gangadharbatla, Hopp, & Sheehan, 2012). Levinson and Gibson (2010) concluded
E. Iliopoulou
University of Western Macedonia, Kozani, Greece
A. Vlachvei ()
Laboratory of Applied Economics, Department of Economics, University of Western Macedonia,
Kastoria, Greece
e-mail: avlachvei@uowm.gr
https://doi.org/10.1007/978-3-030-63970-9_34
494 E. Iliopoulou and A. Vlachvei
that through social media, users can share experiences, ideas, audio-visual material
as well as maintain their contacts with other people. Facebook, Twitter, and Linkedin
have changed the way consumers communicate with each other and with businesses
(Dijkmans, Kerkhof, & Beukeboom, 2015).
Tsimonis and Dimitriadis (2014) added that the great spread of social media
was not left unexploited by businesses, which use them to promote their new
products and services, communicate with their audience on a daily basis, and offer
them “gifts” (discount coupons). However, it was noted by Schultz and Peltier
(2013) that while brands have increased the use of social media, there has been
a slight increase in consumer engagement with the brand. So brands need to use the
technological advances of social media to create long-term customer engagement.
As mentioned by Alalwan, Rana, Dwivedi, and Algharabat (2017), there are
different marketing practices that firms could apply over social media platforms (i.e.,
advertising, e-WOM, customer relationship management, and branding). However,
the significant interest in social media marketing has been in terms of advertising.
Due to their nature as interactive and modern technology (Web 2.0), social media
advertising represents the cutting edge of firm-customer communication (Logan,
Bright, & Gangadharbatla, 2012). High-speed Internet supports consumers’ access
to advertising via video or mobile data, so advertisers who only promote product
descriptions are not doing enough to persuade consumers to buy their product
(Raktham, Chaipoopirutana, & Combs, 2017). Compared to traditional media
advertising or online advertising used on an earlier platform (Web 1.0), firms are
able to have more interactive and informative communication with their customers
(Lee & Hong, 2016). So social media ads could help businesses achieve many
marketing goals, such as shaping customer perception, customer knowledge, and
motivating customers (Alalwan et al., 2017). North America remains the largest
advertising market followed by Asia and the Pacific. Global advertising spending
is expected to increase from $196.4 billion in 2016 to $335 billion in 2020. Also,
mobile Internet advertising is expected to increase from $109 billion in 2016 to $247
billion in 2020 (Guttman, 2019).
Social media has become increasingly important for companies to understand
why consumers visit their pages and advertisements. The purpose of this chapter
is to study consumers’ motivations that lead them to follow a brand page on social
media, the brand content that attracts consumers, and consumers’ motivations for
social media ads.
2 Literature Review
For companies, customer engagement on social media means that customers do not
remain spectators, but participate in the content published by companies. They are
willing to spend time to communicate with brand through online discussions (Evans,
2008). Social media marketing involves the use of various forms of social media
to promote the company’s products and services. Marketers have identified these
Consumers’ Motives for Visiting Social Media Brand Pages and Social Media. . . 495
platforms as important, which facilitate interactions between brands and consumers,

customer engagement, and the development of social trade. Social media improves
rich and live communication through text, image, audio, and video (Gangadharbatla
et al., 2012). Consumer brand communities have a great deal of interaction with
each other. Companies provide consumers with unique and interesting content, also
encourage them to interact with each other and with the brand. As the number
of online consumer communities increases, the number of social media users will
increase (Jahn & Kunz, 2012). Users by country are involved in social media and
shape the final distribution of users around the world. Globally China ranks at the
top of the social media users’ rankings with 673.5 million users for 2018 with a
proposed increase for 2023 to 799.6 million users. India follows with 326.1 million
users and the United States of America with 243.6 million (Clement, 2019). The
most popular social media in the world until January 2020, depending on the number
of active accounts is Facebook, which is used by 2.449 billion active users. YouTube
follows with 2 billion active users. Instagram is in sixth place with 1 billion users
when in seventh place is the new social media TikTok with 800 million users
(Clement, 2020).
2.1 Social Media User Motivations
Motivations that drive consumers to a firm’s social media are a source of information
to improve the company’s marketing strategy. By understanding the motivations of
the users, the companies can create attractive pages, so they attract new members
and achieve repetitions in the traffic of their pages. Therefore, the goal of the brand
is to attract an audience by offering value or satisfaction through its content and
consequently to create a strong level of user engagement (Malthouse, Haenlein,
Skiera, Wege, & Zhang, 2013). It is emphasized that social media is used by
users to promote themselves, communicate, connect, create friendships, informa-
tion, post and share photos, view profiles, entertainment, belonging to a group
(Gangadharbatla et al., 2012; Ng, 2016). Muntinga, Moorman, and Smit (2011)
provide different categories of motivations which are: information, entertainment,
remuneration, personal identity, and empowerment. Kim, Fiore, and Lee (2007)
divided social media motivation into cognitive or extrinsic (remuneration, useful-
ness) and emotional or intrinsic (entertainment, fun, satisfaction). Lin and Lu (2011)
found that enjoyment is the most important factor followed by social presence
and usefulness. Consumers are increasing their use of the media when they realize
that their friends are also using social media. De Vries, Peluso, Romani, Leeflang,
and Marcati (2017) identified five main motivations (self-expression, socialization,
information, entertainment, and remuneration), which effect consumer engagement
in brand-related activities on social media. The results of the research revealed
that these motivations affect two types of activities (creation and contribution).
Self-expression is more related to creating activities and socialization is related
to contributing activities. Other research shows that users used social media for
social interaction and information sharing, so they feel connected to each other
(Chen, 2011). Similar motivations have been found for using social media, such
as entertainment, information social interaction, desire for financial motives, and
consumer value (Berger, 2014). Lim and Kumar (2018) report that the main moti-
vations for consumer participation are: information (e.g., timely, useful), benefits
(e.g., coupons, offers), entertainment (e.g., pleasant, fun), and connectivity (e.g.,
interaction with other people who like the brand). The results show that consumer
engagement depends on entertainment and connectivity. Ladhari, Rioux, Souiden,
and Chiadmi (2019) examine the main motivations and found that financial benefits
(e.g., discount coupons) and content benefits (e.g., product information) encourage
customers to visit Facebook pages. Also, an important motivation is the attitude
of companies towards consumers, who answer any questions of consumer fast and
personal (personal messages).
2.2 Social Media Content
Social media provides opportunities for users, individuals, and companies to inter-
act, share, and create content. These online activities have significant implications
for brand companies (Muntinga et al., 2011). Carlson, Rahman, Voola, and De Vries
(2018) highlighted four online features of social media pages that lead to positive
consumer behavior. These are the quality of the content (appropriate, accurate,
complete, and up-to-date information), the interactivity of the page (well-structured
environment easy for consumers to interact), the sociability (interaction by users
with similar interests), and the quality of contact with the customer (customer
benefits, e.g., speed of communication, receiving important updates, information
about products). Also, the research focused on three value elements: brand learning
value (brand offers useful advice), entitativity value (unity between consumer
communities), and hedonic value (brand–consumer enjoyment). The value of the
entitativity seems the main factor that drives consumers to market intent. Sociability
and content quality affect the values.
Researchers have categorized social media content into four groups: Information
content, where searching for information is one of the main pleasures of the
consumer. Entertaining content leads to a positive attitude of the consumer offering
pleasure and enjoyment (Raacke & Bonds-Raacke, 2008). Remunerative content,
which consumers expect to win a reward, e.g., financial or personal, motives
(Muntinga et al., 2011). Relational content includes the need for consumers to
interact and join groups. It is an easy way to discover their feelings, share their
views, and let their friends learn this information (Leung, 2009). Dolan, Conduit,
and Fahy (2016) showed that the information content facilities the passive-positive
behavior of consumers towards social media because it is not designed to be inter-
active. Entertaining content facilitates the active-positive behavior of consumers
(co-creation and positive contribution). Remunerative content facilitates passive-
positive behavior, while relational content facilitates active-positive behavior as
pleasure is an important factor in predicting behavior. Also, it was found that videos
are quite popular more than images and texts and the use of influencers greatly
affects consumers (Ladhari et al., 2019). In contrast, videos get less “likes” perhaps
because they require more time to watch (Luarn, Lin, & Chiu, 2015).
2.3 Social Media Advertising
In social media ads, customers may have different perceptions and experiences in
the interaction of the advertising. Customers can post, comment, like, and be notified
(Tuten & Solomon, 2017). Logan et al. (2012) pointed out that both entertainment
and information affect the value of social media advertising. Jung (2017) argued that
if customers perceive a targeted ad, they show more interested in it. However, they
ignore these ads if they find that their personal lives are being compromised. Lin
and Kim (2016) pointed out that there is a strong negative effect between concern
about protecting consumers’ privacy and the usefulness of advertising.
There are categories of motivations that define the attitude of consumers towards
social media ads: “Performance Expectancy” is considered as the forecast for the
positive benefits that the consumer will get from the advertisement. Consumers
react positively if they realize that it is useful and valuable to them. “Useful” and
“Performance Expectancy” are similar factors for customer preferences (Chang, Yu,
& Lu, 2015). Lin and Kim (2016) proved the role of use both in the attitude of
customers towards social media and in the intention to buy products from social
media ads. A similar study was conducted by Alalwan (2018), who pointed out that
customers who find social media ads beneficial may be more willing to buy from
them.
Customers could benefit more from “Hedonic motivation” (e.g., joy, fun)
according to Yang, Kim, and Yoo (2013). Shareef, Mukerji, Dwivedi, Rana, and
Islam (2017) proved that entertainment has a significant impact on the value of
social media ad and customer attitudes. Alalwan (2018) has led to the same results
believing that an innovative advertisement can offer entertainment to the consumer
and push him to sell.
Interactivity characterizes social media platforms, changes the process of com-
munication and the way information is exchanged (Sundar, Bellur, Oh, Xu, & Jia,
2014). Interactivity plays a key role in both hedonic motivation and performance
expectancy. This means that if customers realize that there is an interaction related
to social media ads, they will find the same advertisement more useful and therefore
will be motivated to buy the products, Alalwan (2018).
Information is an important marketing tool for advertising, which the company
provides information about the products and services it offers. Lee and Hong (2016)
have shown that there is a positive relationship between informing and responding to
social media ads. Kim and Niehm (2009) defined that there is a positive relationship
between the quality of information and the intention of electronic customer loyalty.
Alalwan (2018) reports the information as the second main factor that determines
the customer intention to buy. This means that customers will buy a product if they
understand the reliability of the information source.
With the term “relevance” in social media ads, Zhu and Chang (2016) defined
“Relevance is the degree to which consumers perceive a personalized ad as related
to them or important in achieving their personal goals and values.” Alalwan (2018)
emphasize that as long as customers believe that social media advertising messages
are related to their own interests, they will be more willing to buy the advertised
product.
3 Research Methodology
This chapter provides primary information to the reader as it contains data that
has not been processed. Also, the method of collecting secondary data is the
bibliographic review. The data collection was done by designing a questionnaire
in “Google Forms” tool. An online survey was conducted and 503 questionnaires
were answered from March 25 to April 17, 2020, in Greece.
The questionnaire contains 13 questions divided into three sections. The first
part includes the demographic data of the sample. The second section includes
the motivations that consumers interact with the brand, here is a list of 27 items
(De Vries et al., 2017; Ladhari et al., 2019; Muntinga et al., 2011). Also, it
includes the content of the publications which consumers react with the brand
(Carlson et al., 2018; Dolan et al., 2016). The third section refers to the behavior
of consumers towards the social media advertisement, here is a list of 20 items
(Alalwan, 2018). The results were measured using a Likert scale (1 = strongly
disagree to 5 = strongly agree). As an exploratory study, the items were written
uniquely for this research. The research was based on specific structures from
published studies by distinguished researchers, according to Table 1.
4 Results
The survey collected 503 completed questionnaires. Table 2 summarizes the

demographic profile of the respondents.
4.1 Factor Analysis: Social Media User Motivations
In the survey, respondents answered in 27 items which they were studied to identify
the motivations and proved suitable for factor analysis. The Kaiser-Meyer-Olkin
measure was very high (KMO = 0.954), using Rotation Method: Varimax with
Kaiser Normalization, which is considered to be excellent adequacy of research
Table 1 An outline of the constructs used in the questionnaire

Constructs Level Authors
Social media motives Information De Vries et al. (2017),
Ladhari et al. (2019), Arli (2017)
Advertisement motives Social interaction Ahmad and Khan (2017), Alalwan (2018)
Entertainment
Remuneration
Contribution
Performance expectancy
Social media content Hedonic motivation Dolan et al. (2016), Carlson et al. (2018)
Interactivity
Information
Relevance
Informational
Call to action
Challenging
Entertaining
Table 2 Demographic data of 503 responders

Sample features Percentage % Frequency N
Gender Male 39.2 197
Female 60.8 306
Age 18–34 53.7 270
35–54 39.2 197
55+ 7.2 36
Working status Civil servant 18.7 94
Private employee 33.2 167
Freelance 18.9 95
Retired 3.2 16
Households 4.8 24
Student 13.5 68
Unemployed 7.8 39
Educational level Elementary-high 38.6 194
school-vocational
training institution
Bachelor degree 40.6 204
Masters degree, PhD 20.9 105
Table 3 KMO and Bartlett’s KMO and Bartlett’s Test

Test of social media user
motivations Kaiser-Meyer-Olkin measure of sampling adequacy. 0.954
Bartlett’s Test of Sphericity Approx. Chi-Square 11,478.722
Df 351
Sig. 0.000
data. Also, Bartlett’s Test of Sphericity gave a significance level of 0.000 (Table 3).
The factors identified were five and account for 73.252% of the “Total Variance
Explained.” Table 4 shows the factors.
Cronbach’s alpha for the factors is presented in Table 5.
In Table 4, the main factors are identified as follows:
• Social interaction (factor 1). People socialize with other members who have same
interests and talk about the brand. They share their position, participate in the
brand content, and help people who ask about the brand.
• Contribution (factor 2). Users collaborate with other users to create content on
social media pages, for example, they participate in online discussions of the
brand.
• Entertainment (factor 3). Consumers react to the brand content because they
enjoy it, relax and spend their time. Talking about their common interests related
to the brand.
• Remuneration (factor 4). Online content activity may include a kind of reward
for the consumer. This is a financial benefit like money, prizes.
• Information (factor 5). Is an important motive for consumers to get involved
in brand page. Consumers look for information about the products they are
interested in, they can read experiences from other consumers who have used
the products and they informed about the social environment.
4.2 Factor Analysis-Social Media Content
In the survey respondents answered in 23 items which were studied to iden-

tify the social media content. The Kaiser-Meyer-Olkin measure was very high
(KMO = 0.960), using Rotation Method: Varimax with Kaiser Normalization,
which is considered to be excellent adequacy of research data. Also, Bartlett’s Test
of Sphericity gave a significance level of 0.000, (Table 6).
The factors identified were four and account for 73.707% of the “Total Variance
Explained.” Table 7 shows the factors. Cronbach’s alpha for the factors is presented
in Table 8.
According to the factors, the content is divided into the following categories:
• Informational content (factor 1). Searching and obtaining information about the
brand is one of the main pleasures of the customer. They use social media to
direct information from brands.
• Call to action (factor 2). Consumers act to the brand content and spread
their knowledge and experiences to other consumers. Is related to the active
participation of users and their public behavior in the brand community.
• Challenging content (factor 3). Usually presents events and issues in a humorous
and often sarcastic way.
• Entertaining content (factor 4) can provide pleasure and enjoyment while leading
to positive attitude of the consumers.
Table 4 Factor analysis results: social media motivations

Rotated component matrix items Motives Factor 1 Factor 2 Factor 3 Factor 4 Factor 5
I am informed about new products .831
I am informed about the current discount .834
products
I am informed about the profile of the .564
companies I follow
I am informed about relevant events .579
I am informed about research related to .640
the companies
I am provided with educational content .606
I am provided with exclusive content .738
I am a member of a community .708
I get personal answers to my questions .608
I communicate with people who have the .554
same interests
I feel connected to people who are like .556
me
I like to engage in conversations with .558
people like me
I meet young people with same interests .569
It is fashionable .588
I find it fun .764
I find it interesting .650
It helps me express my personality .669
It keeps me busy in my free time .659
I can win discounts for members .700
I can win awards .748
I can win prizes .783
I can download photos and videos of the .476
company
I can write reviews for the products and .735
services
I can participate with articles .761
I can participate in discussions .752
I can discover new activities .648
I can give useful-innovative ideas to the .723
company
Table 5 Cronbach’s alpha Factors Cronbach’s alpha No of items

for the factors
1+2+3+4+5 0.963 27
1 0.832 3
2 0.906 8
3 0.913 7
4 0.890 4
5 0.925 5

Test of social media user
motivations Kaiser-Meyer-Olkin measure of sampling adequacy. 0.960
Bartlett’s Test of Sphericity Approx. Chi-Square 10,373.375
Df 253
Sig. 0.000
Table 7 Factor analysis results: social media content

Rotated component matrix items Content Factor 1 Factor 2 Factor 3 Factor 4
Video .587
Live video .746
Podcasting .664
Use GIFs .561
Games .578
Smart-humorous memes .546
Sarcastic content .626
Content that touches sensitive social issues .583
Content that drives in discussion on current events .575
Content that causes nostalgia .715
Use of image .741
Interesting graphics .605
Smart content .798
Optimistic content .751
Humorous content .664
Consulting content .703
Valid content .740
Content that calls for action-charity .599
Content that calls for action for environmental .654
purposes
Content that invites for action for co-creation .596
(photos-videos)
Content that invites consumers to express their .765
opinion
Content that invites consumers to criticize products .816
Content that invites consumers to rate company’s .793
products

for social media content
1+2+3+4 0.965 23
1 0.832 7
2 0.906 6
3 0.913 5
4 0.890 5

Test of social media
advertisement Kaiser-Meyer-Olkin measure of sampling adequacy. 0.942
Bartlett’s Test of Sphericity Approx. Chi-Square 8115.873
Df 136
Sig. 0.000
4.3 Factor Analysis: Social Media Advertising
In the survey respondents answered in 17 items which were studied to identify

the social media advertisement. The Kaiser-Meyer-Olkin measure was very high
(KMO = 0.942), using Rotation Method: Varimax with Kaiser Normalization,
which is considered to be excellent adequacy of research data. Also, Bartlett’s Test
of Sphericity gave a significance level of 0.000, Table 9.
The factors identified were four and account for 79.790% of the “Total Variance
Explained.” Table 10 shows the factors. Cronbach’s alpha for the factors of social
media ads is presented in Table 11.
According to the survey the categories of motivations that define consumers’
attitudes towards social media ads are:
• Interactivity (factor 1) gives more importance to the costumer’s opinion by
enabling them to present their feedback and talk back about their perception and
experience regarding the targeted ads.
• Relevance (factor 2). makes customers feel like social media ads are related to
their own preferences and interests. So companies are capable to deliver their ads
to their targeted customers.
• Performance Expectancy (factor 3). Customers who find social media advertising
beneficial and advantageous are likely to be willing to purchase the targeted
products of these ads.
• Information (factor 4). Customers are looking to social media platforms as an
important source of information. Brand content is available over social media
ads. This makes social media ads a richer information source than any other
traditional tool.
Table 10 Factor analysis results: social media advertisements

Rotated component matrix items Advertisements Factor 1 Factor 2 Factor 3 Factor 4
They are useful in my daily life .602
Increases my chances of achieving tasks to me .805
Help me done tasks more quickly .808
Increase my productivity .755
It is fun .750
It is enjoyable .782
They are important to me .617
They fit to my interests .811
They fit with my preferences .809
Are effective in gathering costumers’ feedback .731
Make me feel like they want to listen to their .781
costumers
Encourage customers offer feedback .846
Facilitate two-way company-customer .763
communication
Help me be loyal to the company .598
It is a good source of product information .680
Provide timely information .743
Provide valid information .702

for social media
advertisement 1+2+3+4 0.960 17
1 0.920 5
2 0.931 5
3 0.906 4
4 0.893 3
5 Conclusion and Discussion
Social media platforms provide opportunities for users to interact, share, and
create content. These online activities have significant consequences for brands.
Social media represents an important change in communications and interactions
between brands and consumers. By understanding social media users’ motivations
companies can attract new members and encourage repeat visits to their pages. This
study provides evidence that consumers consult social media pages and social media
advertisements.
The results confirm the relevant literature (Arli, 2017; De Vries et al., 2017;
Ladhari et al., 2019) of social media motives. The findings were categorized into five
motives: social interaction, contribution, entertainment, remuneration, and infor-
mation, which positively affect consumers’ attitude towards social media pages.
Another important result of this chapter is that the social media content is divided
into four groups: informational content, call to action content, challenging content,
and entertaining content. Brands enhancing their pages with attractive content
(informative and entertainment) can help members and consumers’ commitment.
It is important for the brands to regularly update their social media pages and keep
them entertaining (rich and varied content). The last findings of the study focus
on social media ads. This study identifies four main factors (interactivity, relevance,
performance expectancy, and information), that lead consumers to see a social media
advertisement. Companies spent a lot of money on promoting their products using
social media platforms, so there is always concern about how their campaigns could
attract more customers.
Even though this study successfully clarified the main factors that could shape
consumers’ behavior towards social media, there are limitations that restrict this
study and could be considered in future research. For instance, some other motives
which lead consumers in social media pages like personal identity, empowerment,
or motives in social media ads like privacy concern, habit, hedonic motivation are
not considered in the current study. Thus, it could be useful if studies pay attention
to such aspects. Furthermore, the sample size and profile could also be considered a
limitation as the data were collected only in Greece, future studies could explore this
framework in other countries. Also, the study did not make any distinction between
different types of social media, such as general and specialized social networking
sites (e.g., Facebook and LinkedIn).
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Factors Affecting e-Marketing Adoption
and Implementation in Food Firms: An
Empirical Investigation of Greek Food
and Beverage Firms
Ourania Notta and Afroditi Kitta
Abstract The objective of this study is to explore the implementation and adoption
of e-Marketing in Food and Beverage firms in Greece. Implementation includes the
use levels of e-marketing tools and adoption factors that are relating to the internal
environment (internal factors), Technology Acceptance Model, and Innovation
Diffusion Theory. The combined knowledge of both implementation and adoption
responds to an effort to understand the firms’ performance from the use of innovative
electronic services. In terms of adoption, e-Marketing enhances job performance,
goes with firms’ organizational culture; it is easy for adopters to interact with e-
Marketing tools and does not seem to be influenced by the size of businesses. It was
also found that customers do not trust the e-Marketing tools due to security issues;
and the adoption of digital marketing is due to state incentives and loss avoidance
of market share, related to the businesses’ external environment. The study of the
effect of e-Marketing implementation in firms’ marketing performance at present
and in the future showed that e-Marketing implementation leads to changes in firm
performance mainly in terms of the impact on the good customer relationships, fast
customer communication, new product development, and the provision of better
quality services.
Keywords e-Marketing · Technology acceptance model · Innovation diffusion

theory · Technology-organization-environment framework · Food and beverage
firms · Factor analysis · Performance
O. Notta ()
Department of Agriculture, Program of Agricultural Economics & Entrepreneurship,
International Hellenic University, Alexander Campus, Thessaloniki, Greece
e-mail: ournotta@ihu.gr
A. Kitta
MSc in Innovative Systems of Sustainable Agricultural Production, International Hellenic
University, Thessaloniki, Greece
https://doi.org/10.1007/978-3-030-63970-9_35
510 O. Notta and A. Kitta
1 Introduction
In the frame of the application, adoption, acceptance of e-Marketing technolo-

gies, the theories used in previous studies relate to the Technology Acceptance
Model (TAM), Diffusion Theory of Innovation (DOI), Technology-Organization-
Environment (TOE) framework, and Theory of Planned Behavior (TPB) for under-
standing the adoption and acceptance of new technological tools.
Towards this end, firms must be internally and externally prepared. Internal
readiness can be defined by the availability of human skills (Kohn & Husig, 2006),
financial and technological resources (Lee & Cheung, 2004), and the enthusiasm of
senior management to defend the process of adopting Internet marketing technology
(Levy & Powell, 2002), the compatibility of business culture and values, with the
process of adopting technology (Saffu, Walker, & Hinson, 2008).
For conducting online marketing activities the readiness of customers and
business partners significantly influences the institutionalization of the Internet
Marketing concept (Ghobakhloo, Arias-aranda, & Benitez-amado, 2011). After the
initial phase of e-marketing adoption, external readiness plays an essential role for
firms to fully realize the benefits of technology.
2 Literature Review
2.1 e-Marketing and Internal Factors
Culture at the national and organizational level is a driving force behind the adoption
and implementation of e-marketing among SMEs (Modimogale & Kroeze, 2011;
Saffu et al., 2008). Sparkes and Thomas (2001) found that the global application of
e-Marketing by SMEs was the slowest in the agricultural sector. SMEs specializing
in product manufacturing are less likely to adopt the Internet technologies compared
to the intensive knowledge of consulting organizations (Esteves, 2009) as these firms
receive very little supply chain benefits from e-business.
Firms that follow automation of the supply chain without relying on face-
to-face relationships with customers, organizations, and suppliers integrate the
change of corporate culture, which includes features such as speed, collaboration,
transparency, and interconnectivity (Mozas & Bernal, 2012).
The benefits that stem from adopting a corporate website are proportionate to the
goals that the company is pursuing (Balogun, 2013). Firms that are more dependent
on media such as television, directories, and posters are more likely to adopt and
use the Internet for marketing purposes, as they already have a higher level of
technology compatibility (Khan, 2007). Mora-Monge, Azadegan, and Gonzalez
(2010) emphasize that systematic implementation of e-marketing strategies is
positively associated with the increased performance of the SME owner/manager,
while companies that fail to implement these systems are jeopardizing their potential
returns.
Factors Affecting e-Marketing Adoption and Implementation in Food Firms:. . . 511
Different levels of webpages introduction depend on the features of the Man-

agers. These firms are usually based on centralized management and face difficulties
in finding skilled staff with specialized IT knowledge and skills. Grahovac and
Miller (2009) argue that employees’ abilities to use Internet technologies are
intangible and, therefore, more difficult to emulate competitors. A key factor
in adopting technology is owner-manager knowledge of Internet marketing and
business models (Molla, Peszynki, & Pittayachawan, 2010). Knowledge could come
from the personal contacts of the SME network administrator and executives tend
to play an important role in influencing other members of the organization to adopt
the same technologies (Ifinedo, 2011).
The decision to adopt e-marketing as an innovation concerning the personal
characteristics has been incorporated by some authors at the academic level (Gloy
& Akridge, 2000; López-Becerra, Arcas-Lario, & Alcon, 2017) as users perceive
less complexity and greater comparative advantages.
Among the firms’ characteristics that influence IT approval decisions, the most
commonly used are size by number of employees or turnover, years in which the
firm operates in the industry (Balogun, 2013), or its legal form (Estapé-Dubreuil &
Torreguitart-Mirada, 2014). Rashid and Al Qirim (2001) argue that firms will adopt
technologies that are aligned with their activity (firm scope), but these technologies
should offer comparative advantages.
2.2 e-Marketing and External Factors
Dlodlo and Dhurup (2013) argue that encouraging the participation of SMEs in
digital marketing platforms due to the pressure of competition, suppliers, and
customers is complicated by the Perceived Usefulness of e-Marketing tools. In
highly competitive markets, companies rely on external information to improve their
technological infrastructures, to accomplish success (Zhu, Kraemer, & Xu, 2006).
The capacity to commit financial and human resources will contribute to enhanced
e-readiness of SMEs. Creating an exchange of knowledge and developing net-
works/partnerships will facilitate social networking, globalization and the presence
of firms internationally, and maintaining their competitive advantage. Other external
factors, e.g., regulatory environment, market structure, and supporting industries are
also reported by the authors (Hsiao, 2007).
IDT argues that individuals adopt at different times, as their perceptions for an
innovation general characteristics differ (Lee et al., 2010). Government not only
undertakes to invest in infrastructure and to improve regulation of the e-commerce
market but also provides public services (e.g., information provision and education,
subsidies, acting as a trusted third-party) to farmers and agri-food firms (Zeng, Jia,
Wan, & Guo, 2017).
2.3 e-Marketing, Electronic Service, and Efficiency

of Electronic Services
Electronic service has become a basic element of effective customer service; the
importance of its impact on the value of the business depends to a large extent on
the innovation of the electronic service. e-services innovation is specifically based
on services provided only through a virtual online presence representing the type
of businesses using Internet technologies. This concept evokes long-term business
models, demanding the organization leaders’ to analyze, record, and highlight the
transformative impacts of e-business on the most critical and essential processes of
their organizations (Fahey, Srivastava, Sharon, & Smith, 2001).
To develop a business e-service capability, researchers rely on Dynamic Capa-
bilities Theory (DCV), which highlights the abilities embedded in a company’s
managerial and organizational processes. In this respect, the ultimate aim is to
reform resources and to coordinate processes effectively that will respond to
rapid environmental changes (Gibson & Birkinshaw, 2004). Researchers have
suggested that firms should cultivate dynamic capabilities that allow them to renew,
modify, and adapt the existing firm particular resources in reply to Internet-related
developments (Daniel & Wilson, 2003).
Chen and Tsou (2012) reported that the ability of information technologies
can help businesses collect and categorize information deemed necessary for the
development of innovative services, in order to better understand customer needs
and preferences. In addition, IT capability may potentially allow firms to reduce
“vagueness” in e-innovation (Hinnant & O’Looney, 2003).
Chuang and Lin (2015) argue that to improve service quality or provide
customized services cooperation is a prerequisite to the interaction of many firms.
Collaboration capacity represents the ability of a business to work with partners
for the accumulation and exchange of knowledge, managing uncertainty, formulat-
ing strategic decisions, or providing specific services (Li & Wang, 2007).
Two-way communication between the two parties in the transaction is critical for
successful individual relationships (Ernst & Hooker, 2006). Tactics, such as giving
visitors the ability to browse the web as well as linking through this site to other
sites, allow for commercial transactions, improving the efficiency of navigation,
paying attention to search engine optimization, increasing the exposure of websites,
and investing more money in Internet Marketing are also mentioned by some authors
(Bodini & Zanoli, 2011).
In digital marketing, great efforts have been made to enhance practical and
theoretical understanding of measuring efficiency that provides a more integrated
approach by linking activities to corporate strategy (Phillips, 2007).
Due to the numerous e-commerce applications in product development and
pricing strategies, the greatest impact on business processes is the efficiency of
distribution and communication (Gregory, Ngo, & Karavdic, 2017). E-commerce
experts agree that supply chain management is the main sector where e-commerce
has the greatest impact on business efficiency (Koellinger, 2008), especially in
B2B commerce. Communication efficiency can reduce search and bargaining costs
(Lucking-Reiley & Spulber, 2001). Communication efficiency using e-commerce
also reduces information asymmetries between buyers and sellers by providing up-
to-date and comprehensive information (Shapiro & Varian, 2013).
The general consensus is that there are two main categories of efficiency
measures: financial efficiency, marketing efficiency (Morgan, Katsikeas, & Vorhies,
2012) e-business success and website efficiency (Ramanathan, 2010). Gregory
et al. (2017) adjusted their research to measure market efficiency. Applying this
framework, they developed a measure of e-commerce efficiency about export enter-
prises that involves e-commerce development to achieve the strategic objectives for
the export ventures target-market. Their findings show an integrated aggregate of
eight strategic goals: lower channel costs for customer transactions, maintaining
relationships with overseas customers, leveraging new revenue sources, offering
new services to existing customer base, reduction of operating costs, developing
stronger relationships with suppliers and buyers, access to new international
markets, introducing new services and products on the international market rapidly.
The impact of using e-Marketing on marketing activities has been categorized as
follows: (1) presales marketing activities and (2) after-sales marketing (Avlonitis
& Karayanni, 2000). The implementation of e-Marketing affects marketing per-
formance and effectiveness of SMEs such as new sales, (Simpson & Docherty,
2004), new customers (Daniel & Wilson, 2002), developing new markets and good
customer relationships (Simpson & Docherty, 2004), improved productivity (Daniel
& Wilson, 2002), increased market share (Eid & Elbeltagi, 2005), and increased
brand equity (Stockdale & Standing, 2004).
To improve marketing performance and effectiveness through cost reduction of
using e-Marketing tools has emerged to improve business profitability by leading to
better marketing effectiveness (Avlonitis & Karayanni, 2000).
Although business efficiency is not easily measurable, effective measurements
of the financial and operational dimensions are expected to provide a more accurate
measurement of e-business performance (Coltman, Devinney, & Midgley, 2007).
Few articles carry out a systematic and comprehensive analysis of the tactics at each
stage of the food supply chain that enables e-commerce in agri-food firms. There is
a clear research need to establish possible links between specific e-commerce tactics
in the agri-food sector and the increased digital marketing performance, operational
performance, and financial performance in order to provide more accurate and
practical measures for organizations to adopt e-commerce. The objective of this
study is to explore the implementation and adoption of e-Marketing in Food and
Beverage firms in Greece. The combined knowledge of both implementation and
adoption responds to an effort to understand the firms’ performance from the use of
innovative electronic services.
3 Research Design and Methodology
Structured interviews (questionnaires) were conducted with agri-food firms to

collect primary data which were provided online to interested stakeholders. Data
classification and statistical analysis have to be accomplished with IBM SPSS
Statistics 23.0 Software. The companies involved in the survey are illustrated by
location in Table 1. The largest percentage is located in Central Macedonia (21.6%),
followed by the Region of Attica (17.6%), Peloponnese (13.8%), and Thessaly
(11.8%).
To determine the sample in this study, it was not possible to specify through an
official source the number of the firms in the agri-food sector using e-Marketing
tools. The sample was random and firms search was done through online Business
Directories (www.xo.gr and www.vrisko.gr) and exhibitors’ information leaflets at
Food and Beverage exhibitions: Detrop, Expotrof, and Food Expo in the various
industry sectors. Despite this, the number of questionnaires sent was two hundred
(200) of which one hundred and two (102) were returned filled-out. This means that
the response rate of the sample is 51%.
As shown in Table 2, the data presented is related to the use of e-Marketing
by agri-food firms through the various forms of e-commerce (B2B, B2C, and
B2G) and digital tools: Internet, e-mail, Mobile, Facebook, Twitter, Instagram, and
Youtube. The rates 0%, 25%, 50%, 75%, and 100% express the implementation
rates to carry out business activities, while the rates in the table demonstrate the
number of the participated firms based on the respondents’ answers according to
the implementation rates.
Firstly, 31.30% and 32.40% of firms are entirely 100% dependent on e-marketing
via Business-to-Business (B2B) transactions and the use of e-mail, respectively.
Furthermore, for 75% of marketing activities, 22% of firms use e-mail, 20%
of firms use Internet, 16.70% of firms use E-commerce (B2B), and 16% of firms
Table 1 Distribution of REGION/no of firms Percentage

firms by location
ATTICA: 18 17.6%
CENTRAL GREECE: 2 1.96%
CENTRAL MACEDONIA: 22 21.6%
WESTERN MACEDONIA: 8 7.84%
EASTERN MACEDONIA and THRACE: 4 3.9%
EPIRUS: 4 3.9%
NORTH AEGEAN: 6 5.9%
SOUTH AEGEAN: 2 1.96%
PELOPONNESE: 14 13.8%
THESSALY: 12 11.8%
WEST GREECE: 5 4.9%
CRETE: 5 4.9%
Total: 102 100%
Table 2 Implementation rate of e-Marketing tools
B2B B2C B2G Internet E-mail Mobile Facebook Twitter Instagram YouTube
0% 14.70% 29.40% 58.80% 4.90% 10.80% 53.90% 23.50% 84.30% 79.40% 70.60%
25% 18.60% 33.30% 21.60% 42.20% 22.50% 23.50% 29.40% 8.82% 8.82% 19.60%
50% 18.60% 16.60% 8.80% 25.50% 12.70% 14.70% 23.50% 6.86% 8.82% 3.92%
75% 16.70% 13.70% 1% 20% 22% 6% 16% 0% 2% 5%
100% 31.30% 6.80% 9.80% 7.80% 32.40% 1.96% 7.84% 0% 0.98% 0.98%
Factors Affecting e-Marketing Adoption and Implementation in Food Firms:. . .
515
use Facebook. Low implementation rates present the use of Twitter, Instagram,
and Youtube. Moreover, 50% of digital business operations is related to the use
of Internet Marketing (25.50%), Facebook Marketing (23.50%), B2B (18.60%),
Business-to-Consumers: B2C (16.60%), and Mobile Marketing (14.70%). With
regard to the 25% for the use of digital tools the rates relating to firms range from
8.82% to 42.20% with the lowest percentage corresponding to Twitter and Instagram
and the higher to the Internet, B2C commerce, and Mobile Marketing. Additionally,
more than 70.60% of firms do not use the new opportunities offered by digitization
through Twitter, Instagram and Youtube.
Following El-Gohary (2010) and Eid and El-Gohary (2013), managers were
asked to express their opinion about the internal and external factors that affect
e-marketing as well as the implementation of e-marketing by the firm. The final
measure included 39 items about the internal environment, 17 items about the
external environment, and 18 factors about the e-marketing implementation all
assessed on a five-point Likert scale with the anchors 1 = very much disagree,
5 = very much agree.
Firstly we have utilized a principal component factor analysis. To extract a
specific number of factors, the research was based on the Guttman-Kaiser Criterion.
Therefore, factors with Eigenvalue greater than 1 are eligible. Through the analysis
of the principal component method four factors have been identified explaining
together 54.3% of the variance in the items concerning the internal environment.
See Table 3 for exact item wordings and factor analysis results.
The first factor named as “Perceived relative advantage,”, accounts for 27.79%
of the Total Variance and is characterized by significant correlation in parameters
concerning the use of E-Marketing in order to enhance effectiveness on the job, to
increase productivity, to make it easier to do the job, and to improve the quality of
the work. The second factor (explains 10.09% of Total Variance) is assigned the
characterization “Organizational culture towards e-Marketing” as there is a high
correlation between the parameters concerning the support from the management,
the consistent with business values and beliefs, the staff behavior in line with e-
Marketing adoption. The third factor named as “Perceived Ease of Use and Skills”
explains 9.07% of Total Variance. In this category, there are high correlations
in respondents’ answers concerning the interaction with E-Marketing tools, the
easiness of use, and the existence of qualified and skilled marketing staff in the
enterprise. These features show that the high level of skills leads to easier use
of e-Marketing tools. The fourth component is “Resources/Firm size—Types of
products—Firm scope” which explains 6.58% of the Total Variance. The highest
correlations are found at the size of the firm, the types of products produced by the
enterprise, and the location of the firm. The extent of adopting e-Marketing tools
seems to be influenced by the firm’s characteristics and orientation.
Table 4 presents the results from the creation of three components that have been
identified explaining together 58.7% of the variance in the items concerning the
firm external environment (external factors). To extract a specific number of factors,
the research was based on the Guttman-Kaiser Criterion. Therefore, factors with
Eigenvalue greater than 1 are eligible. The factor “Cultural orientation towards e-
Table 3 e-Marketing and internal business environmenta

Components
Organizational Resources/firm
Perceived culture Perceived ease size–types of
relative towards of use and products–firm
advantage e-Marketing skills scope
E-Marketing (E-M) tools are 0.185 0.194 0.788 −0.107
easy to use
Easy to interact (E-M tools) 0.216 0.133 0.827 0.076
Require little mental effort −0.014 −0.198 −0.305 0.196
(E-M tools)
Very important to conduct 0.232 0.469 0.151 0.369
business (E-M tools)
Enough support from the 0.269 0.728 0.239 0.068
management
It is consistent with business 0.134 0.850 0.235 0.026
values
Personnel go in line with E-M 0.118 0.787 0.201 −0.104
adoption
It is consistent with business 0.209 0.860 0.174 0.084
beliefs
Personnel behavior is in line 0.208 0.818 0.219 −0.053
with E-M adoption
Marketing team use E-M tools 0.167 0.694 0.216 0.170
Existence of qualified and −0.047 0.346 0.384 −0.247
skilled marketing staff in firm
Existence of good 0.230 0.292 0.103 0.240
technological infrastructure in
firm
Existence of sufficient 0.212 0.002 0.218 −0.234
financial resources for E-M
adoption
Implement E-M even if did −0.108 0.242 0.052 0.276
not have skilled and qualified
personnel
Types of products produced −0.051 0.384 −0.151 −0.503
by firm influenced decision of
adopting E-M
Implement E-M regardless of 0.215 −0.203 −0.022 0.651
the types of products
produced by firm
Type of products did not −0.030 −0.136 −0.008 0.653
affect the decision of adopting
E-M
Implement E-M regardless of 0.021 −0.056 −0.078 0.523
national or international firm
scope
(continued)
Table 3 (continued)
Components
Organizational Resources/firm
Perceived culture Perceived ease size–types of
relative towards of use and products–firm
advantage e-Marketing skills scope
Adopted E-M for 0.238 0.177 −0.024 0.349
international business
Not adopted E-M because −0.158 −0.023 −0.076 −0.566
business is at local level
Firm size is too small to adopt 0.058 −0.220 −0.022 −0.502
E-M
The size of firm affects 0.147 −0.095 0.090 −0.601
decision to adopt E-M
Will adopt E-M when become 0.420 −0.294 0.007 −0.443
a bigger firm
Adopted E-M regardless of 0.052 0.086 −0.045 0.771
firm size
E-M usage enables to 0.651 0.292 0.173 0.096
accomplish tasks more
quickly
E-M usage improves the 0.812 0.292 0.104 0.177
quality of the work
E-M usage makes it easier to 0.817 0.178 0.161 0.134
do the job
E-M usage increases 0.855 0.120 0.153 0.082
productivity
E-M usage gives greater 0.781 0.011 0.192 −0.130
control over work
E-M usage enhances 0.868 0.079 0.079 0.077
effectiveness on job
E-M usage improves job 0.807 0.045 0.109 0.064
performance
E-M usage is compatible with 0.479 0.343 0.058 −0.233
aspects of work
E-M usage is compatible with 0.496 0.440 0.146 −0.127
current situation
E-M usage fits absolutely 0.483 0.561 0.258 −0.032
with the work
E-M usage fits into work style 0.552 0.345 0.323 0.025
Interaction with E-M is clear 0.195 0.074 0.692 −0.002
and understandable
It is easy to do what you want 0.196 0.252 0.812 0.013
with E-M
Believe that E-M is easy to 0.183 0.232 0.802 0.134
use
Learning to use E-M is easy 0.070 0.204 0.785 0.057
for you
a ExtractionMethod: Principal Component Analysis. Rotation Method: Varimax with Kaiser
Normalization
Table 4 e-Marketing and external business environmenta

Components
Cultural orientation State Competitive
towards e-Marketing influence Pressure
Competitive pressure is one reason for 0.054 −0.041 0.592
adoption E-M
Business environment supports −0.401 −0.154 0.431
conducting E-M
There are enough legal acts to provide −0.072 −0.029 0.726
a supportive business environment for
E-M
Competitive pressure is the main 0.103 0.148 0.847
reason for adoption E-M
Adopted E-M to avoid losing market −0.009 0.130 0.857
share to competitors who are already
using E-M
Adopted E-M as a response to market −0.027 −0.087 0.406
trends
Adopted E-M because of the 0.102 0.954 −0.041
incentives provided by the government
Adopted E-M because of the 0.059 0.959 −0.049
protection provided by the government
Adopted E-M because of government 0.021 0.943 0.023
influences
Customers do not like purchasing 0.714 −0.192 −0.170
through the Internet
Customers do not trust E-M tools 0.708 −0.012 −0.188
There is lack of trust between 0.683 0.157 0.099
enterprises conducting E-M activities
Customers prefer to pay in cash 0.620 0.149 0.124
instead of electronic payment methods
Customers do not trust E-M due to 0.857 0.159 0.136
security issues
Customers do not trust E-M due to 0.845 0.096 0.093
privacy issues
Customers distrust firms that provide 0.683 0.122 −0.355
products using these tools
Majority of customers are able to −0.388 0.116 −0.005
utilize technology
a Extraction
Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser
Normalization
Marketing” (explains 25.79% of Total Variance) shows significant correlation in

parameters concerning trust of e-Marketing tools due to security and privacy issues,
preference of payment in cash instead of electronic payment methods (credit cards,
debit cards and ability to utilize technology). The second factor “State Influence”
(explains 17.64% of the Total Variance) reveals a significant correlation in param-
eters concerning the protection, the incentives, and the influences provided by the
government at the adoption of e-Marketing. In this case, the state provides business
support for the use of e-Marketing tools. Finding and managing business resources,
especially for small businesses, are important in adopting digital marketing.
The last factor for the firm’s external environment is “Competitive Pressure”
(explains 15.31% of Total Variance). Variables with the highest correlations are
associated with competitive pressure and competitive business environment. The
correlations results show that firms operating in a highly competitive environment
are more likely to adopt e-Marketing, while some are based on legal acts, where
by instituting e-Marketing in their perception for the benefits, they end up adopting
new technologies at different times. In addition, support for the development of
networks and synergies between firms facilitates social networking, the exchange of
knowledge on strategies to follow in developing and improving their products.
Table 5 presents the research results on the implementation of e-Marketing in the
Food and Beverage firms. Variables were classified into three categories according
to the Guttman-Kaiser Criterion explaining together 49.1% of the variance. The first
factor explains 29.74% of the total variance and is characterized as implemented
traditional marketing-oriented since there is a significant correlation in parameters
concerning the use of e-marketing in order to support traditional commercial
activities (e.g., pricing information, customer service), to conduct activities with
other firms or government (B2B and B2C)and to communicate with your customers.
These firms use both traditional media (television, billboards) for marketing
purposes and e-marketing as they show a higher level of compatibility resulting from
their experience in traditional media and subsequently adopt digital technology.
The use of e-marketing is based on communicating with customers and product
advertisements for value creation. In the second category, there are companies
that highly implement e-marketing tools (explains 10.68% of the Total Variance).
Significant correlations revealed in parameters concerning the interaction between
firms and customers through registration forms, newsletters and e-mail accounts,
the existence of customer database in order to perform marketing activities (e.g.,
inform customers about new products), and the ability of commercial transactions
(e.g., selling products and accepting payment via website) through websites.
These firms aim through interaction with customers to understand their needs and
provide personalized services. They use both transactional and relational website
model, cultivating their dynamic capabilities to achieve superior performance. The
last category regarding the implementation of e-marketing shows the results for
enterprises that do not implement e-marketing in their business processes (explains
9.09% of the Total Variance). Significant correlations revealed in parameters
concerning variables related to the non-use of Internet and E-Marketing in order
to conduct its marketing activities.
Table 6 presents the data that emerged on the impact of e-Marketing imple-
mentation, at the present and in the future to firms marketing performance:
Correlation analysis was conducted for two variables, pre- and after-sales marketing
activities. For all the variables Sig. two-tailed = 0.000 < 0.05, that is, there is
a correlation between the present and the future. This means that e-Marketing
Table 5 e-Marketing implementation by the firma

Components
Implementing High imple-
traditional marketing mentation Nonimplementation
Conduct marketing activities −0.596 −0.139 0.011
according to traditional marketing
Do not have any access to the −.458 .189 0.493
internet or any Electronic
Marketing means
Use E-M resources to 0.550 0.139 −0.351
communicate with customers
Use E-M resources to advertise 0.322 0.300 −0.433
products
Use Internet in accessing other 0.669 0.227 −0.289
companies’ websites
Use E-M resources to support firm 0.685 0.449 −0.204
traditional commercial activities
Carry out systematic or regular 0.204 0.543 −0.366
updates to website
Website is connected to a −0.068 0.718 −0.032
customer database
Enterprise interacts with its 0.196 0.787 −0.141
customers through registration
forms, newsletters, and e-mail
accounts
Use E-M resources to conduct 0.224 0.601 0.145
commercial transactions
Have a customer database that use 0.406 0.553 −0.323
to perform marketing activities
Conduct marketing activities with −0.213 0.297 −0.281
the form B2B
Conduct marketing activities with −0.686 0.302 −0.095
the form B2G
Firm does not use Internet in −0.027 −0.139 0.808
conducting its marketing activities
Firm does not use e-mail in −0.124 0.066 0.756
Firm does not use Mobile 0.067 −0.353 0.405
Marketing in conducting its
marketing activities
Firm does not use Social Media in −0.274 −0.130 0.569
Firm depends heavily on Internet 0.539 0.438 −0.113
in conducting marketing activities
a ExtractionMethod: Principal Component Analysis. Rotation Method: Varimax with Kaiser
Normalization
Table 6 Spearman’s correlation nonparametric test

Correlationa Sig. (two-tailed)
New sales (currently) and new sales (in the future) 0.659 0.000
New customers (currently) and new customers (in the 0.688 0.000
future)
Increased profits (currently) and increased profits (in the 0.526 0.000
future)
Good customer relationships (currently) and good customer 0.804 0.000
relationships (in the future)
Reduction of sales costs (currently) and reduce sales costs 0.640 0.000
(in the future)
Faster discovery of customer needs (currently) and faster 0.739 0.000
discovery of customer needs (in the future)
Greater customization of products (currently) and greater 0.733 0.000
customization of products (in the future)
New markets (currently) and new markets (in the future) 0.715 0.000
Faster communication with customers (currently) and faster 0.791 0.000
communication with customers (in the future)
Increased customer satisfaction (currently) and increased 0.797 0.000
customer satisfaction (in the future)
Developing new products (currently) and developing new 0.838 0.000
products (in the future)
Faster adaptability of customer needs (currently) and faster 0.737 0.000
adaptability of customer needs (in the future)
Providing better services quality (currently) and providing 0.814 0.000
better services quality (in the future)
Increased market share (currently) and increased market 0.642 0.000
share (in the future)
Increased brand equity (currently) and increased brand 0.797 0.000
equity (in the future)
implementation appears with changes in firm performance. This relationship by

interpreting correlation is positive and strong. Variable that showed the highest
positive correlation causing changes in firm performance is related to “Developing
New Products” (0.838).
Additionally, in Table 7 based on two-sided test “Sig. (two-tailed)” revealed that
there is a statistically significant difference for e-Marketing performance variables
at present and in the future for all variables except the brand equity.
Research results in regard to the impact of e-Marketing implementation on firm
marketing performance revealed that all the parameters related to performance
have a positive and strong correlation. E-Marketing orientations are affected in the
present or in the future by the implementation of e-Marketing.
Table 7 Wilcoxon nonparametric statistical test

Z Asymp. Sig. (two-tailed)
New sales (in the future) −5139 0.000
(Currently)
New customers (in the future) −3884 0.000
(Currently)
Increased profits (in the future) −4460 0.000
(Currently)
Good customer relationships (in the future) −2773 0.006
(Currently)
Reduction of sales costs (in the future) −4272 0.000
(Currently)
Faster discovery of customer needs (in the future) −3632 0.000
(Currently)
Greater customization of products (in the future) −4147 0.000
(Currently)
New markets (in the future) −4009 0.000
(Currently)
Faster communication with customers (in the future) −3557 0.000
(Currently)
Increased customer satisfaction (in the future) −3661 0.000
(Currently)
Developing new products (in the future) −4066 0.000
(Currently)
Faster adaptability of customer needs (in the future) −3805 0.000
(Currently)
Providing better services quality (in the future) −3000 0.003
(Currently)
Increased market share (in the future) −5596 0.000
(Currently)
Increased brand equity (in the future) −1809 0.070
(Currently)
4 Conclusion
The main objective of this study was to explore the level of e-Marketing implemen-
tation and to investigate the factors affecting its adoption, and the impact of using
e-Marketing on overall marketing performance in the case of Food and Beverage
firms in Greece. Implementation includes the use levels of e-marketing tools and
adoption factors that are relating to the internal environment (internal factors),
Technology Acceptance Model, and Innovation Diffusion Theory.
Initially, the level of e-Marketing use for e-commerce types (B2B, B2C, B2G)
and e-marketing tools was highlighted: Internet Marketing, e-mail Marketing,
Mobile Marketing, Facebook Marketing, Twitter Marketing, Instagram Marketing,
Youtube Marketing. Specifically, 31.3% and 32.40% of food and beverage firms
rely entirely (100%) on B2B activities through e-marketing and e-mail, respectively.
With regard to e-marketing tools, research has revealed that Internet Marketing is
used by 42.20% of the firms for 25% of their business activities online. Social media
marketing (Facebook Marketing) is used by 29.40% of firms at 25% level and by
23.50% of food firms at 50% level for business activities. Twitter Marketing shows
high nonimplementation rates for 84.30% of sample firms. Afterwards, 79.40% of
firms do not apply Instagram Marketing for sharing pictures, and 70.60% of sample
does not use Youtube Marketing for the promotion of products and services.
Concerning the factors that influence the adoption of digital marketing, the
principal component analysis for the internal firm environment highlights perceived
relative advantage as a top priority for respondents in enhancing their job effective-
ness, increases their productivity, makes it easier to do their job, and improves the
quality of the work they do.
Research findings on the external business environment from the principal
component analysis revealed that cultural orientation towards e-Marketing has been
rated as the most important factor by the respondents. The issue of mistrust between
enterprises conducting e-Marketing activities and firms that provide products using
these tools motivates customers to pay in cash, as they are not able to use technology.
Regarding e-Marketing implementation, firms that implement traditional mar-
keting use e-marketing in order to support traditional commercial activities (e.g.,
pricing information, customer service), to conduct activities with other firms or
government (B2B and B2C) and to communicate with your customers. Firms that
are heavily involved with e-marketing tools have developed the highest correlation
to customer interaction through registration forms, newsletters, and e-mail accounts.
Furthermore, research results in regard to the impact of e-Marketing implemen-
tation on firm marketing performance revealed that all the parameters related to
performance have a positive and strong correlation. The mean values of the variables
in the present and the future are statistically significant, while the mean of the
variable “Brand Equity” there is no statistically significant difference between the
present and the future.
Research findings reveal the factors’ complexity that shape the business envi-
ronment (entrepreneur, employees, customers, suppliers, state) by adopting, imple-
menting, and measuring e-Marketing performance on the overall firm marketing
performance in the case of Greek food and beverage firms. There is a large field for
further research for examining the links between firm objectives, e-marketing and
performance, and the generated interactions, using other statistical methods in the
future and searching for other variables.
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An Application of Differential Equations
on Anthropogenic Climate Change
Gerassimos Bertsatos, Soultana Moustakli, Zacharoula Kalogiratou,

and Theodoros Monovasilis
Abstract The relationship between Carbon Dioxide (CO2 ) emissions, temperature

change, and growth in Germany is examined with the use of a system of differential
equations and data for the period 1991–2016. Two models are examined: the first
considers that growth, measured as the proportionate change in the per capita Gross
Domestic Product (GDP) is affected by per capita CO2 emissions and the level of per
capita GDP. Also, the proportionate change in per capita CO2 emissions is affected
by the level of the per capita GDP and the level of per capita CO2 emissions. The
second model considers that growth is affected by the per capita CO2 emissions,
temperature, and the level of per capita GDP. Also, the proportionate change in per
capita CO2 emissions is affected by the level of the per capita GDP and the level
of per capita CO2 emissions. Finally, in this model, the proportionate change in
temperature is affected by the level of the per capita GDP and the level of per capita
CO2 emissions. It was found that the signs of the estimated coefficients in the two
models are the expected ones.
Keywords CO2 emissions · Economic growth · Temperature change
JEL Codes: C32, Q43, Q53, Q56
1 Introduction
In this work, the relationship between CO2 emissions, temperature change, and
growth in Germany is examined with the use of a system of differential equations
and data for the period 1991–2016. A model will be developed explaining growth,
G. Bertsatos () · S. Moustakli · T. Monovasilis

Department of Economics, University of Western Macedonia, Kozani, Greece
Z. Kalogiratou
Department of Informatics, University of Western Macedonia, Kozani, Greece
https://doi.org/10.1007/978-3-030-63970-9_36
528 G. Bertsatos et al.
measured are per capita GDP change, CO2 emissions change, and temperature
change as a result of these factors that interact simultaneously with each other. But
first, let us say some theoretical things about the relation of CO2 emissions and
temperature.
Greenhouse gas emissions related to energy use represent around 70% of total
global emissions, while electricity production and heat supply were accountable for
26% of total global greenhouse gas emissions in 2004 (IPCC, 2007). The climate
impact of energy-related emissions and the way that we will solve the issue of
climate change has been the object of significant research effort. Global climate
change is characterized by a rise in average temperatures in most regions, changes
in precipitation and seasonal patterns in many regions, changes in the intensity and
pattern of extreme weather events, and sea-level rise, which is expected to affect
both energy supply and demand.
Scientists have concluded that the balance between the input and the output of
the energy is responsible for the final temperature of the Earth. In other words, if the
energy coming in from the Sun and the final energy that will escape out of the Earth
having considered our emissions were in balance, the Earth’s temperature would
remain constant.
The Intergovernmental Panel on Climate Change (IPCC), mentioned a few years
ago that the average global temperature has risen by 0.85 ◦ C in the last 100 years
(IPCC, 2013). In addition, the last three decades and more specifically 1983 to 2012
were said to be the warmest period of the last 1400 years. That tendency which is a
fact is called climate change. Thus, the temperature of the Earth has risen, and this
is because of the energy imbalance. These trends signpost that there was a clearly
observed and accelerating rate of earth’s warming during the twentieth century.
However, warming trends differ among regions of the world. Jones and Wigley
(1990) analyzed available land and marine meteorological records from 1967 to
1986 and they noted that most regions in both northern and southern hemispheres
had experienced marked warming. Few parts in the northern Pacific and Atlantic
oceans were the only exception that experienced cooling to some extent. The authors
concluded that if climate model predictions are correct, global warming would
accelerate in the future and this is something that has been shown to be true.
As we can easily conceive the amount of energy that is coming from the sun
is constant, the scientific community has concluded that the main cause of the
current global warming is the anthropogenic increase in the greenhouse gases that
trap the energy radiation from the Earth towards the space (IPCC, 2007). One of
the greenhouse gases, carbon dioxide (CO2), gets most of the attention as one of
the most crucial key element of the Earth’s climate system. For example, IPCC
(2007) estimated that Earth would warm between 2 and 6 ◦ C over the next century,
depending on how fast the carbon dioxide emissions grow. Given the effects of CO2
have on radiation and climate change, many researchers and policymakers have
focused on finding the CO2 reduction targets to lessen its effect. For this reason,
a lot of agreements have occurred such as the Kyoto protocol which consists of two
commitment periods, the first from 2005 to 2012 and the second from 2012 to 2020.
The main target of the first commitment period was the reduction of the developed
countries’ GHG emissions by at least 5% below 1990 levels. This proposal has
An Application of Differential Equations on Anthropogenic Climate Change 529
been confirmed by the Annex I countries (members of OECD countries and 12

countries from Central and Eastern Europe) but not from the US which is the second
largest emitter following China. Another major agreement was the Paris agreement
(2015) that would compel all major polluters to pay for CO2 emissions. The main
CO2 emissions maned China, US, and India have all signaled that they will not
approve any agreement that will commit them legally to reduce CO2 emissions. In
the Paris agreement was indicated that the increase in the global average temperature
is 2 ◦ C above the preindustrial levels. But in 2017, US announced that they will
stop all participation in the 2015 Paris Agreement on climate change mitigation and
reduction of CO2 emissions.
However, the scientific community has not reached a unanimous opinion about
the causes of the long-term temperature rise. Some researchers claim that cloud
coverage is a potential factor in temperature change. Carslaw, Harrison, and Kirkby
(2002) suggested that “variations in the intensity of galactic cosmic rays in the
atmosphere would alter in cloud coverage, leading to change the temperature of
the Earth” (Svensmark, 1998). However, while there is uncertainty about the effect
of clouds on temperature some researchers have tried to identify whether the cloud
coverage has negative or positive feedback to the warming effects. For example,
Dessler (2010) concluded that the temperature is influenced positively by the cloud’s
coverage. Likewise, Clement, Burgman, and Norris (2009) and Lauer, Hamilton,
Wang, Phillips, and Bennartz (2010) claimed that clouds have a positive effect on
temperature increase over the Eastern Pacific. Furthermore, McLean (2014) claimed
that the lower cloud coverage from 1987 to the late 1990s is responsible for the
increase in temperature since 1987.
Given the above theoretical analysis, we can now proceed with the main part of
our work. We will analyze the relationship between CO2 emissions, temperature
change, and growth for Germany with the use of a system of differential equations
and data for the period 1991–2016.
2 Model Description and Result
Two models are examined: the first considers that growth,

measured as the
proportionate change in the per capita GDP y1 (t)/y1 (t) , in constant 2010 prices,
is affected by per capita CO2 emissions (y2 (t)), and the level of per capita GDP
(y1 (t)); primed variables indicate the first derivative with
respect to time (t). Also,
the proportionate change in per capita CO2 emissions y2 (t)/y2 (t) is affected by
the level of the per capita GDP (y1 (t)) and the level of per capita CO2 emissions
(y2 (t)). Therefore,
y1 (t)
y1 (t) = b1 + a11 y1 (t) + a12 y2 (t),
y2 (t) (1)
y2 (t) = b2 + a21 y1 (t) + a22 y2 (t)
where bi are constants and aij i = 1, 2, j = 1, 2 are the coefficients to be

estimated. Note, that the value of the parameters bi ’ s and aij ’ s in (1) is determined
simultaneously for time t.
The second model considers that growth, measured as the proportionate change
in the per capita GDP y1 (t)/y1 (t) , in constant 2010 prices, is affected by per capita
CO2 emissions (y2 (t)), temperature (y3 (t)), and the level of per capita GDP; primed
variables indicate the first derivative with respect to time (t). Also, the proportionate
change in per capita CO2 emissions y2’ (t)/y2 (t) is affected by the level of the per
capita GDP (y1 (t)) and the level of per capita CO2 emissions (y2 (t)).. Finally, in this
model, the proportionate change in temperature is affected by the level of the per
capita GDP (y1 (t)) and the level of per capita CO2 emissions (y2 (t)). Therefore,
y1 (t)
y1 (t) = b1 + a11 y1 (t) + a12 y2 (t) + a13 y3 (t),
y2 (t)
y2 (t) = b2 + a21 y1 (t) + a22 y2 (t), (2)
y3 (t)
y3 (t) = b3 + a31 y1 (t) + a32 y2 (t)
where bi are constants and aij i = 1, . . . , 3, j = 1, . . . , 3 are the coefficients to be

estimated. Note, that the value of the parameters bi ’ s and aij ’ s in (2) is determined
simultaneously for time t.
The two models in (1) and (2) have been used for the estimation of the parameters
bi s and aij s using annual data from 1991 to 2016. We denote yij the value of the
function yi (t) at time tj . This is observed data and they are approximated by y1 (t),
y2 (t), y3 (t) using the nonlinear least squares approximation method. The nonlinear
least squares problem that has to be solved is described by (3), and this can be
achieved by using an iterative method.
n
2 2
min yi tj − yij for (1)
i−1 j =1
(3)
3 n 2
min yi tj − yij for (2)
i−1 j =1
j = 1, . . . , n denote discrete moments of time t.

The approximating functions yi (tj ) are not known and, therefore, they cannot be
defined explicitly, but can be found as the solutions of a system of two, in the case of
(1) and three in the case of (2), differential equations. This is a problem of parameter
estimation in ordinary differential equations (Gonin & Money, 1989; Williams &
Kalogiratou, 1993). The system of ODEs in (1) and (2) is solved numerically, using
the classical fourth order Runge—Kutta method and the nonlinear least squares
minimization MATLAB function (fminsearch) is used for solving (3). Nonlinear
optimization methods are iterative methods and, therefore, an initial estimate of the
parameters is required to start the iterative process.
To obtain the initial estimate of the parameters, the nonlinear problem is

transformed into a set of linear least squares problems, for each of LHS variables
in (1) and (2), following the work by Kalogiratou et al. (Kalogiratou, Mono-
vasilis, Moustakli, & Tsounis, 2013; Kalogiratou, Monovasilis, & Tsounis, 2012;
Kalogiratou, Monovasilis, Tsounis, Bertsatos, & Moustakli, 2020), Monovasilis,
Kalogiratou, Tsounis, Bertsatos, and Moustakli (2020), Bassiakos, Kalogiratou,
Monovasilis, and Tsounis (forthcoming). Then, these linear problems are solved
and an initial estimate for the parameters is found, to be used as an input into the
nonlinear method. Therefore, (1) and (2) were estimated by the OLS method using
the dataset described above. Then the values of the estimated coefficients have been
used as an initial estimate for the nonlinear problem. The coefficients in (1) and (2)
were subsequently estimated by the method described at the beginning of the section
and they are the following:
For the first model:
a11 = −0.000011649612678 a12 = −0.0636802738198

a21 = −0.000019251151077 a22 = −0.1076415057095485
b1 = 1.084670051971844 b2 = 1.784935151277531
Sum of Squared Error (SSE) = 0.92523561155021
Graph 1 plots the functions y1 (t), y2 (t) for the parameters derived from the
nonlinear least squares together with the actual values.
The estimated coefficients for the second model are:
a11 = 1.1896e − 05 a12 = −5.1922e − 02 a13 = 1.8085e − 02

a21 = −1.6424e − 05 a22 = −7.5271e − 02 a23 = 0
a31 = 2.9232e − 05 a32 = 1.3312e − 01 a33 = 0
b1 = 0.8055 b2 = 1.3573 b3 = −2.4242
SSE = 1.090383318426234.
Graph 2 plots the functions y1 (t), y2 (t), y3 (t) for the parameters derived from the
nonlinear least squares together with the actual values.
Parameter bi ; i = 1, . . . , 3 shows the autonomous growth of per capita GDP,
per capita CO2 emissions, and temperature (in the second model). The autonomous
growth is connected to the existing value of the variables. The signs of the estimated
coefficients in the two models are the expected ones.
Graph 1 Nonlinear model. Observed values of growth (upper graph part) and percentage change
in per capita CO2 emissions (lower graph part) are presented by asterisks while fitted values by
continuous lines. Source: Authors’ estimations
3 Conclusion
The relationship between Carbon Dioxide (CO2 ) emissions, temperature change,

and growth in Germany is examined with the use of a system of differential
equations and data for the period 1991–2016. Two models are examined: the first
considers that growth, measured as the proportionate change in the per capita Gross
Domestic Product (GDP) is affected by per capita CO2 emissions and the level of per
capita GDP. Also, the proportionate change in per capita CO2 emissions is affected
by the level of the per capita GDP and the level of per capita CO2 emissions. The
second model considers that growth is affected by the per capita CO2 emissions,
temperature, and the level of per capita GDP. Also, the proportionate change in per
capita CO2 emissions is affected by the level of the per capita GDP and the level
of per capita CO2 emissions. Finally, in this model, the proportionate change in
temperature is affected by the level of the per capita GDP and the level of per capita
CO2 emissions. It was found that the signs of the estimated coefficients in the two
models are the expected ones.
Graph 2 Nonlinear model. Observed values of growth (upper graph part), percentage change
in per capita CO2 emissions (middle graph part), and percentage temperature change (lower
graph part) are presented by asterisks while fitted values by continuous lines. Source: Authors’
estimations
Acknowledgment Financial assistance from research grant 70318 by the Research Committee of
the University of Western Macedonia is gratefully acknowledged.
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Index
A Allegrini, M., 358

Abbott, L.J., 358 Al Qirim, N.A., 511
Abdi, H., 111, 112 Al-Saleh, Y., 326, 328
Abidin, C., 462 Al-Samarrai, B., 347
Abu-Naser, S., 313 Al-Shawwa, M.O., 313
Acaravci, A., 380 Altamuro, J., 357
Acemoglou, D., 480 Altman, D.G., 253
Acharya, L., 137 Amato, M., 71
Acharya, V.V., 447 Amihud, Y., 109, 111, 112, 115, 116
Adams, R.B., 213 Amir, E., 97
Adeyeye, M., 77 Amstromg, M., 202
Admassu, M., 358 Anagnostopoulou, E., 364
Aebi, V., 213 Anand, J., 44, 47
Afesorgbor, S.K., 348 Anantharaman, D., 97
Afonso, A., 83, 174 Anastasiou, D., 287
Agas, K., 189 Anderson, R., 333
Aghion, P., 148 Anderson, R.E., 191
Agiomirgianakis, G.M., 285–295 Anderson, S.R., 392, 400–401
Aguirre, E., 466 Andreasen, A.R., 34
Ahmad, A., 499 Andreás, P., 213
Ahmadi, A., 347 Andrikopoulos, A., 128
Ahmed, R., 422, 425, 426 Anginer, D., 213
Ahn, D., 348 Ang, J.B., 381
Akaike, H., 42, 44 Ang, S.H., 76
Akridge, J.T., 511 Annunziata, A., 70
Akroush, J., 472 Anseel, F., 236
Alalwan, A., 494, 497–499 Apalkova, V., 158
Alalwan, A.A., 494 Apergis, N., 380, 381, 483
Alcon, F., 511 Apostolou, M., 190
Alesina, A., 124, 125, 174 Arampatzis, K., 364
Alessi, L., 412 Arcas-Lario, N., 511
Algharabat, R., 494 Ardagna, S., 174
Alhenawi, Y., 46 Arena, M., 359
Alkire, S., 250 Argento, D., 358
https://doi.org/10.1007/978-3-030-63970-9
536 Index
Arias-aranda, D., 510 Baranowska-Prokop, E., 267–282

Arjaliès, D.L., 203 Baranzini, A., 380
Arli, D., 504 Bareit, M., 380
Arndt, O., 326 Barrett, L.F., 462
Arnedo, L., 363 Barro, J.R., 476
Arnett, D., 34 Barro, R., 479
Arouri, M.H., 380 Barro, R.J., 174
Arranz, N., 58 Bartov, E., 363
Arrow, J.K., 476 Bashaw, R.E., 189
Arrow, K., 58 Batsinilas, E., 367
Asafu-Adjaye, J., 381 Bauer, F., 46
Asheim, B., 332 Baumert, T., 325–342
Askari, H., 347 Bayraktar, N., 170–185
Aslan, A., 381 Bazhenova, O., 346–355
Åslund, A., 347 Beasley, M.S., 358, 361, 371
Atallah, G., 58 Beatty, A., 357
Athanasoglou, E., 483 Beccarini, C., 188, 190
Athanasoglou, P., 474 Becchetti, L., 148
Atkinson, T., 250 Becht, M., 358
Audretsch, D.B., 148 Becker, K., 460, 461
Avinash, E., 445–457 Beck, R., 287
Avlonitis, G.J., 513 Bédard, J., 362
Aw-Hassan, A., 472 B˛edowska-Sójka, B., 110, 120
Axhami, M., 188–196 Behar-Horenstein, L., 236
Azadegan, A., 510 Bekhet, H.A., 380, 387
Azen, R., 293 Bekiaris, M., 364
Azzone, G., 359 Belegri-Roboli, A., 483
Bellur, S., 497
Beltratti, A., 213
B Benatzi, S., 97
Babecký, J., 412 Beneš, Z., 202
Babin, B.J., 191 Benitez-amado, J., 510
Bablok, W., 253 Bennartz, R., 529
Badinger, H., 83 Ben Youssef, A., 380
Bagnasco, A.M., 311–322 Berger, A.N., 287, 496
Baharumshah, A. Z., 4, 6, 15, 25 Berg, S., 287
Bakhshi, S., 462, 463 Bernal, E.J., 510
Bakshi, G., 434 Bernanke, B., 287
Balcilan, M., 4, 6, 25 Bernanke, B.S., 452
Baldi, F., 47 Berry, L.L., 33
Bali, M., 348, 354, 355 Bertsatos, G., 527–533
Balish, S.H.M., 190 Besana, A., 32–35
Balla, A., 394 Besleme, E., 459–466
Ballantyne, D., 33 Beukeboom, C.J., 494
Ball, E., 472 Bhattacharya, M., 333
Ballesta, J., 361 Bhimani, A., 216
Balogun, M.T., 510, 511 Bianchini, S., 148, 149
Baltagi, B.H., 287, 290 Biau, O., 82
Banbury, C.M., 148 Bieniasz, A., 299
Banerjee, S., 58, 59 Bilson, J.F.O., 412
Baños-Caballero, S., 300 Birkinshaw, J., 512
Bara, E.Z., 69–77 Birks, M., 395
Bara, E.Z.G., 71 Bishop, J.A., 293, 415
Index 537
Black, A., 333 Burke, Q.L., 98

Black, F., 421, 422, 424, 431, 432 Burns, A.F., 3
Black, W.C., 191 Buschgens, M., 463
Blanchard, O., 82 Bussell, H., 33, 34
Bland, J.M., 253 Butler, M., 363
Bloch, H., 333 Byrtusova, A., 160
Bloom, N., 148
Blundell, R., 148
Boccanfuso, D., 202 C
Bodini, A., 512 Cadbury, A., 212, 361, 362
Bogers, M., 164 Cafaro, F., 460
Bohlen, G.M., 71 Campbell, A., 47
Bollerslev, T., 422 Campbell, J.Y., 452
Bolton, P., 358 Cancellieri, G., 43
Bonds-Raacke, J., 496 Cañibano, L., 204
Bonfatti, A., 125, 131 Cantillon, B., 250
Bonfiglioli, A., 125 Cant, M.C., 189
Boone, P., 447 Cao, C., 434
Booth, C., 250 Capron, L., 44, 46, 47
Borio, C., 2, 412 Capuano, C., 58
Boronat-Moll, C., 148 Cara, M., 460, 462, 463
Borsella, E., 159 Caramanis, C., 363
Bosecke, K., 46 Carcello, J.V., 362
Boshoff, W.H., 7 Cardinaels, E., 392
Boskou, G., 357–373 Carlaw, K., 475
Botha, I., 3, 4, 7, 8, 11, 15, 18, 25 Carlson, J., 496, 498, 499
Bottazzi, G., 148 Carlsson-Kanyama, A., 70
Bouali, M., 4 Carneiro, L., 348
Boudriga, A.N., 287 Carrincazeaux, C., 326
Bound, D., 236 Carr, P., 425
Bournakis, I., 481 Carslaw, K.S., 529
Brady, E., 460 Castro, V., 287
Brady, M., 235 Cavallaro, F., 382
Brandao-Marques, L., 213 Certo, S.T., 362
Brattström, A., 148 Chaibi, A., 380
Breach, A., 447 Chaiboonsri, C., 159
Brender, A., 125 Chaipoopirutana, S., 494
Bright, L.F., 494 Chakraborti, S., 293, 415
Bristol, T., 189 Chalip, L., 189
Broni, G., 391–404 Chang, B., 313
Brooks, C., 10, 11, 16, 111 Chang, J.H., 498
Brožová, D., 202 Chang, Y.T., 497
Brouwer, E., 148 Charitoudi, G., 391–404
Bruggeman, W., 392 Chary, S.T., 299
Bruner, R., 53 Chatfield, K., 159
Bryan, S.H., 448 Chatterij, A., 45
Buchinsky, M., 150 Chawla, R.L., 347
Budescu, D.V., 293, 415 Cheng, B.S., 381
Budinský M., 135–146 Chen, J., 110, 496, 512
Buesa, M., 326, 328, 330–333 Chen, L.H., 358
Bukht, R., 158 Chen, M.H., 71
Bundo, J., 188–196 Chen, P.C., 98
Burda, C.M., 481 Chen, S., 251
Burgman, R., 529 Chen, T., 288
538 Index
Chen, Z., 434 Correia, A., 189, 190

Chernyak, O., 352 Corsetti, G., 83
Chesbrough, H., 164 Corwin, S.A., 114
Cheung, C.M.K, 510 Courteau, L., 362
Chiadmi, N.E., 496 Covin, J.G., 270, 274
Chinoracky, R., 158–165 Cox, J., 432, 433
Chiu, Y.P., 497 Crawford, G.W., 4–6, 25, 26
Chodorow-Reich, G., 452 Czerwińska-kayzer, D., 299
Choi, J., 137
Chordia, T., 110
Chornodid, I., 346–355 D
Chortareas, G., 125 Dabalen, A., 251
Chortareas, G.E., 483 DaDalt, P. J., 361
Chorvatovičová, L., 96 Dad’o, J., 234
Chovancová, B., 107 Dagevos, H., 71
Christopher, M., 33 Dahlman, C., 158
Chtourou, S.M., 363 Dai, R., 58
Chuang, S.H., 512 Dalton, C.M., 362
Chui, L., 358 Dalton, D.R., 362
Chuk, E., 97 Daly, S., 380
Chung, H.H., 358 Damanpour, F., 148
Church, B.K., 358 Damodaran, A., 44, 47, 52
Čihák, M., 287 Daniel, L., 512, 513
Čirjevskis, A., 43–53 Danneels, E., 45
Ciulla, J.B., 235 Dao, Q.T.M., 164
Claessens, S., 213 Das, K., 33
Clarence-Smith, T., 43–53 d’Aspremont, C., 58
Clark, E., 9 Datt, G., 250
Clawson, P., 347 D’aveni, R. A., 362
Clement, A.C., 529 Davidson III, W.N., 361
Clemente, G., 71 Davidsson, P., 45
Clement, J., 495 De Andrade, C., 348
Clement, M., 313 Deaner, R.O., 190
Clements, M.P., 4, 5, 8, 18, 26 de Arroyabe, J., 58
Clements, N., 313 de Bakker, E., 71
Clonan, A., 71 Debes, J., 461
Coad, A., 148–150, 153 Debnárová, L., 212
Coe, D., 480 Dechow, P.M., 362
Cohen, G.D., 125 Deci, E.L., 189
Cohen, J., 303, 362 Deeds, L., 148
Cohen, P., 303 DeFond, M.L., 366
Cohen, W., 148 De Haan, J., 125, 128, 131
Cohen, W.M., 148 de la Pottier, V.P., 480
Colbert, F., 34 De La Villarmois, O., 402
Coltman, T.R., 513 Delgado-Verde, M., 164
Combs, H., 494 De Maya, S.R., 71
Comfort, D., 136 Demirel, P., 148
Conduit, J., 496 Denis, D., 448
Coners, A., 392, 403 Derbali, A., 380
Cooper, R., 148, 392, 393 Desai, R., 358
Corejova, T., 159 Desai, V., 358
Corejová, T., 158–165 Dessler, A.E., 529
Cornet, V., 460 Detken, C., 412
Correa, R., 213 De Vany, A., 319
Index 539
Devinney, T.M., 513 El-Gohary, H., 516

de Vos, K., 250 El-Gohary, H.O., 516
De Vries, L., 495, 498, 499, 504 Ellingson, L.L., 395
De Vries, N., 496 Elliott, K.A., 348
De Wet, M.C., 2–6, 8, 9 Ellsmoor, J., 417
De Young, R., 287 El-Mahdy, D.F., 367
DeZoort, F.T., 358 Elpelt, B., 334
Dhaliwal, D.A.N., 362 Enders, W., 15
Dharmapala, D., 449 Engle, R.F., 385
Dhebib, B., 472 Enqvist, J., 300
Dhurup, M., 511 Enriques, L., 449
Diamantopoulos, A., 71 Ernst, S., 512
Dibra, S., 147–154 Escobar, N., 71
Dickey, D., 383 Espinoza, R., 287
Dieci, E.L., 189 Esposito, A., 32–35
Dijkmans, C., 494 Estapé-Dubreuil, G., 511
Dittmar, L., 360 Esteves, J., 510
Dlodlo, N., 511 Esteves, S., 189, 190
Dlubak, M., 392 Evans, D., 494
Docherty, A.J., 513 Everaert, P., 392
Dogan, E., 381
Dolan, R., 496, 498, 499
Domonkos, S., 97 F
Donghui, Z., 202 Fabrigar, L.R., 191, 192
D’onza, G., 358 Facione, P.A., 235
Dosi, G., 148 Fahey, L., 512
Doumpos,M., 363 Fahy, J., 496
Doyle, P., 33 Fama, E.F., 361, 362
Doz, Y., 268 Fan, C.K., 288
Draženović, B.O., 97 Fang, C., 381
Draper, P., 188 Farinha, J., 361
Drazen, A., 125 Farinha, L., 326
Drehmann, M., 2 Fatas, A., 83
Dritsaki, C., 379–387 Febriani, F., 188
Drogalas, G., 364 Feijoo, G., 71
Duan, Z., 58 Feldman, R., 287
Duffett, R.G., 77 Fernandes, N.O., 326
Duman, Y.S., 381, 383 Fernandez de Lis, S., 287
Dungey, M., 213 Ferrand, A., 188, 190
Dunis, C.L., 47, 48 Ferreira, F.H.G., 251
Dunning, E., 189 Ferreira, J.J., 326
Durišová, M., 202 Ficery, K., 43
Dwivedi, Y.K., 494, 497 Fidell, L.S., 192
Fidrmuc, J., 213
Field, A., 99
E Field, Z., 99
Eaton, T.V., 98 Figueiredo, B., 463
Eberle, U., 70 Filipenko, A., 346–355
Edquist, C., 148 Finkelstein, S., 46, 362
Edsand, H.-E., 326 Fiore, A.M., 495
Efthyvoulou, G., 125 Fitoussi, J.-P., 417
Eichengreen, B., 412 Flavin, T.J., 213
Eid, R., 513, 516 Fliedner, G., 268
Elbeltagi, I., 513 Fodha, M., 381
540 Index
Fofack, H., 175, 287 Gibson, G.B., 512

Fong, K.Y.L., 115 Gibson, S., 493
Foran, J., 110, 115 Gilbert, E., 462
Forbes, D., 33, 34 Gilchrist, S., 287
Forni, L., 125, 131 Gillespie-Lynch, K., 460
Forrer, J., 347 Gitz, V., 70
Forsund, F., 287 Glaeser, E., 58
Fotourehchi, Z., 348 Glasure, Y.U., 381
Francis, J.R., 362 Glen, J., 287
Frankel, J.A., 412 Gloy, B., 511
Frankfort-Nachmias, C., 252 Gołaś, Z., 299
Frank, J., 348 Goedhart, T., 250
Franklin, R., 395 Goh, B.W., 360
Fraser, M., 34 Goldenstein, M., 87
Fratantoni, M.C., 4–6, 25, 26 Goldman, L., 461
Freel, M., 148 Goldman, S.L., 268
Freeman, C., 328 Goll, I., 269
Friedman, B.M., 452 Gompers, P., 447
Friedman, E., 447 Gong, B., 475, 476
Friesen, P.H., 270 Gonin, R., 530
Frija, A., 472 González, A.D., 70
Fuglie, O.K., 472 Gonzalez, M.E., 510
Fuller,W.A., 383 Goold, M., 47
Furceri, D., 174 Gootjes, B., 125, 131
Furman, J.L., 329 Gopinath, G., 452
Gourinchas, P.O., 412
Goyenko, R.Y., 113, 115
G Graham, M., 300
Gaggi, N., 460 Grahovac, J., 511
Gancia, G., 125 Gramling, A.A., 358
Gangadharbatla, H., 493–495 Grammatikos, T., 412
Gantz, W., 190 Granger, C.W.J., 171, 178, 180–184, 380,
Garcia-Meca, E., 361 385, 386
García-Piqueres, G., 326, 340 Grassi, I., 58
García-Teruel, P., 300 Grasso, O., 71
Garfield, L., 49 Gravetter, F.J., 200
Gaschet, F., 326 Gray, D.E., 236
Gavett, E., 244 Grebitus, C., 70
Gellynck, X., 70 Greenstein, J., 251, 258
Gendron, Y., 203 Gregory, G.D., 512, 513
Gentilini, U., 251, 258 Greyling, L., 3
Georgakarakou, C., 189 Griffith, R., 148, 480
Georgiou, E., 474 Griliches, Z., 476
Georgopoulos, D., 293, 409–419 Grofčíková, J., 212–229
Gerard, E., 82 Grover, V., 269, 270
Gerdoçi, B., 147–154 Guan, Y., 97
German, S.D., 34 Guarascioa, D., 148
Geroski, P., 58 Guba, E.G., 395
Geroski, P.A., 148, 153 Guellec, D., 480
Gertler, M., 287, 332 Gujarati, D.N., 10, 11
Gervais, M., 392, 402 Gul, F.A., 361–363
Ge, Z., 58 Gummesson, E., 33
Ghobakhloo, M., 510 Gunaskaran, A., 268
Gibassier, D., 203 Guo, H., 511
Index 541
Gupta, R., 4 Hochman, N., 460

Gupta, V., 313 Hodžić, S., 97
Gurau, C., 77 Hoffmeister, A.W., 480
Gutiérrez-Rojas, C., 326 Hofmann, J., 313
Guttman, A., 494 Höjer, M., 71
Holden, C.W., 113, 115
Holdsworth, M., 71
H Hollingsworth, C.W., 362
Haenlein, M., 493, 495 Hong, I.B., 494, 497
Hagenaars, A., 250 Hooker, N.H., 512
Hair, J.F., 191, 333 Hopp, T., 493
Håkansson, P., 358 Hospido, A., 77
Halberstadt, V., 250 Hossain, M.S., 380, 381
Hall, N., 460 Howells, R., 460, 461
Hamilton, J.D., 84, 86 Howitt, P., 148
Hamilton, K., 529 Hřebíček, J., 447
Hansen, H., 70 Hsiao, R.L., 511
Hanson, C.L., 77 Hsu, Y., 360
Han, T.C., 360 Huang, R.D., 113
Han, Y., 70 Hubbard, R.G., 447
Happonen, V., 71 Hudcovský, J., 107
Harabi, N., 58 Hudec, O., 159
Harrison, H., 395 Hufbauer, G.C., 348
Harrison, R.G., 529 Hughes, J.P., 287
Hart, C., 138, 142 Hull, J., 422, 432, 435
Hartung, J., 334 Hu, M.C., 327, 340
Hasbrouck, J., 110, 111 Hunecke, M., 70
Hashimzade, N., 347 Hunt, K.A., 189
Haughton, J., 250 Hunt, S.D., 34
Healy, P.M., 362 Hu, Q., 58
Heeks, R., 158 Husig, S., 510
Heijs, J., 326, 330 Hussain, S.B., 34
He, J., 381 Hutchinson, M.C., 110
Helfat, C.E., 45 Hye, Q.M.A., 380
Helmore, E., 49
Helpman, E., 480
Hemetsberger, A., 462 I
Hénin, P., 82, 84, 87, 88 Ibrahim, A., 472
Hennig-Thurau, T., 313 Ifinedo, P., 511
Heracleous, L., 136 Iliopoulou, E., 493–505
Herd, T., 43 Ingersoll, J., 432
Hernández-Truyol, B.E., 347 Iribarren, D., 71
Hervas-Oliver, J.L., 148 Ishii, A., 58
Heshmati, A., 148 Ishii, J., 447
Heston, S., 422, 432, 433, 435, 436 Islam, R., 497
Heva, L., 394 Ismail, M.T., 4
Highfield, T., 462 Izáková, K., 212–229
Hill, E., 34 Izzo, M.G., 189
Hillier, D., 136
Himmelberg, C.P., 447
Hinnant, C.C., 512 J
Hinson, R., 510 Jackson, J.E., 112
Hinz, J., 347 Jackson, T., 71
Hitt, M.A., 46, 362 Jacobs, J., 58
542 Index
Jacoby, N., 148 Karagiorgos, T., 364

Jacquemin, A., 58 Karavdic, M., 512
Jagongo, A., 299 Karayanni, D.A., 513
Jahanshahi, A.A., 45, 52 Karbowski, A., 58–66
Jahn, B., 495 Karim, S.A.A., 4
Jakubik, P., 287 Karolyi, G.A., 115
Jakubík, P., 287 Kartalis, D.N., 394
Jalles, J.T., 174 Kartalis, N., 391–404
Jamel, L., 380 Kasman, A., 381, 383
James, J., 189 Kasprzycki, T., 137
Jameson, K.M., 462 Kasturi, R., 299
Jamieson, H., 460, 462, 463 Katsikeas, C.S., 513
Jansen, E., 287 Katsoulacos, Y., 482
Jaworska, E., 203 Kavoura, A., 459
Jayanthakumaran, K. Kaya, A., 174, 175
Jayarathne, T.A.N.R., 300 Keller, W., 480
Jellouli, S., 287 Kemp, E., 43
Jensen, M.C., 361, 362 Kennan, G., 349
Jia, F., 511 Kennedy, L., 462
Jia, H., 497 Keogh, R., 236
Jiang, W., 360 Kerkhof, P., 494
Jimenez, G., 287 Khandker, S.R., 250
Johannessen, J.A., 148 Khandwalla, P.N., 270, 274
Johansen, S., 384 Khan, M., 87
Johansson, A., 358 Khan, M.N., 499
Johnson, K., 71 Khanna, T., 448
Johnson, S., 447 Khanna, V., 449
Jolliffe, D., 251 Khan, S., 510
Jolliffe, I.T., 112 Khin, A.A., 71
Jonas, A., 269, 272 Khoshnoudi, M., 382
Jones, C., 136 Ki, E., 313
Jones, H.G., 471, 479 Killam, L., 396
Jones, P., 136 Kim, E., 159, 164
Jones, P.D., 528 Kim, H., 497
Jong-A-Pin, R., 125 Kim, H.-Y., 252
Joutz, F., 480 Kim, J., 137
Jung, A.R., 497 Kim, J.B., 362
Junni, P., 269 Kim, J.H., 460
Juselius, K., 384 Kim, J.Y., 46
Kim, M.S., 189
Kim, S.H., 313
K Kim, S.Y., 159, 164
Kaiser, H.F., 112, 117 Kim, T., 497
Kallal, H., 58 Kim, Y., 495, 497
Kalogiratou, Z., 527–533 King, R.G., 287
Kambhampati, S., 460 Kiriakoylis, G., 391–404
Kamenidou, I., 69–77 Kirkby, J., 529
Kamenidou, I. (Eirini), 459–466 Kirkos, E., 358, 360
Kamien, M., 58 Kitamura, K., 189
Kaminsky, G.L., 412, 415 Kitta, A., 509–524
Kang, Y.-H., 148, 153 Kiyotaki, N., 287
Kaplan, A.M., 493 Klein, A., 361, 362, 371
Kaplan, R.S., 393, 400–402 Kleinbaum, M., 45, 46
Kapteyn, A., 250 Kleinknecht, A., 148
Index 543
Klein, N., 287 Lai, T.W., 381

Kleinschmidt, E., 148 Lam, H., 203
Klein, T., 47, 48 Lane, P.J., 46
Klepper, S., 148 Laopodis, N.T., 174
Kliesch-Eberl, M., 45 Larouche, A., 202
Klomp, J., 125, 128, 131 Lash, M., 313
Klumpes, P.J., 97 Laubscher, P., 4, 7
Know, H., 188 Lauer, A., 529
Koellinger, P., 513 Lauko, V., 159
Kogan, J., 448 Lawrence, E.C., 287
Kogler, S., 462 Lean, H.H., 381
Kohn, S., 510 Leaver, T., 462
Kožiak, R., 159 Lee, C.M.C., 120
Kolb, D.A., 236 Leeflang, P.S.H., 495
Kompa, K., 97 Lee, H., 511
Kontogeorgis, G., 360 Lee, H.H., 494, 495
Korajczyk, R., 110, 120 Lee, H.Y., 358
Kormancová, G., 234–246 Lee, J., 497
Kosen, M., 268 Lee, K.-H., 111, 113, 114, 120
Koštuříková, I., 199–208 Lee, O.K.M., 510
Kota, H.B., 449 Lee, Y., 137
Kotasková, A., 107 Lega, K., 32
Kotler, P., 34, 76 Le, H.T.T., 164
Koutoupis, A., 364 Leone, A.J., 363
Koutsouris, A., 69 Leong, S.M., 71, 76
Kowitt, B., 49 Leong, T.P., 71
Kraemer, K., 511 Leon-Guerrero, A., 252
Krammer, S.M.S., 326, 340 Leontief, V., 346
Kress, G., 461 Leung, L., 496
Krishnamoorthy, G., 362 Leung, S., 362
Krishnan, J., 359, 360, 362 Levant, Y., 402
Krishnan, V., 148 Levendis, A., 421–444
Krishnaswami, S., 46 Levinson, J., 493
Kroeze, J.H., 510 Levy, M., 510
Krolzig, H.M., 4, 5, 8, 18, 26 Levy, P.I., 347
Krugman, P., 412 Liang, D., 58
Kucharčíková, A., 202 Li, B., 460
Kucharčíková, V., 202 Libby, T., 358
Kumar, A., 496 Lichtenberg, 480
Kumar, K.S., 299 Li, D., 360
Kumar, R., 452 Lievens, F., 236
Kumar, S., 452 Liew, V.K., 4, 6, 15, 25
Kumar, V., 33 Li, G., 381
Kun, S.S., 4 Li, J., 4, 5, 23, 24, 26
Kunz, W., 495 Lim, H., 496
Kwon, E.S., 144 Lin, B., 381
Lin, C.A., 497
Lincoln, Y.S., 395
L Lind, R., 213
Labro, E., 392 Lin, H.N., 512
Lacinak, M., 158 Lin, K.Y., 495
Ladhari, R., 496–499, 504 Lin, M., 252
Lagoa-Varela, D., 213 Lin, P., 58, 59
Lai, C.A., 32 Lin, Y.F., 497
544 Index
Lippi, M., 148 Manago, A., 460

Lipsey, R.C., 475 Manasakis, C., 58
Liu, Y., 313, 381 Manikonda, L., 460
Li, X., 313, 338, 340, 512 Mankiw, N.G., 479
Li, Y., 97 Mannheim, K., 71
Lizarraga, F., 363 Manolas, G., 285–295
Loganathan, N., 382 Manolopoulos, Y., 360
Logan, K., 494, 497 Manovich, L., 462, 463
Logothetis, V., 125 Mantovani, E., 159
Loizides, I., 128 Manz, F., 287
Lombardo, M.P., 190 Maradin, D., 97
Lööf, H., 148 Marais, D.J., 3
López-Becerra, E.I., 511 Marcati, A., 495
López-Fernández, C., 326, 328, 340 Marcellino, M., 4, 5
López-López, I., 71 Marcinkowska, M., 213
Lorek, S., 70 Mardani, A., 382
Loukianova, A., 44, 47 Maré, 431–444
Louri, H., 287 Maré, E., 421–430
Louton, D., 97 Marlier, E., 250
Louzis, D., 287 Marrocu, E., 326
Love, I., 447 Marshall, A., 58
Love, R., 250 Martín-de-Castro, G., 164
Lowe, P., 412 Martinez, M., 330
Luarn, P., 497 Martinez Pagf Çs, J., 287
Lucas, H.C. Jr., 252 Martínez-Solano, P., 300
Lucas, R., 471, 476, 479 Martin, K.A., 358
Lucking-Reiley, D., 513 Martinov-Bennie, N., 358
Ludema, R.D., 348 Mascarenhas, B., 268
Lu, H.P., 495, 497 Mashiach, A., 190
Lumpkin, G.T., 148 Mas, M., 159
Lundvall, B.-A., 328 Matar, A., 380
Lusch, R.F., 462 Mathews, J.A., 327, 340
Lv, W.Q., 71 Mathys, N.A., 380
Lynham, S.A., 395 Matis, K., 392
Matzler, K., 46
Mavroudeas, S., 481
M Mayer, J., 480
MacKinnon, J.G., 384 Mazzucato, M., 148
Mackintosh, J., 174 McCarthy, J., 97
Madan, D., 425, 434 McConnell, J., 448
Maddison, A., 478 McCracken, M.W., 9
Madudova, M., 159 McDonach, C., 392
Mahadevan, R., 348 McFarlane, A., 463, 466
Mahroum, S., 326, 328 McKelvie, A., 148
Majercakova, M., 159 McKenzie, J.F., 77
Majewska, E., 95–121 McLean, J., 529
Makori, D.M., 299 McQueen, G., 24
Makri, M., 46 Mealy, S., 158
Maktouf, S., 380 Medeiros, M.C., 4
Maletta, M.J., 358 Mehus, I., 189
Malthouse, E.C., 495 Meier, A., 83
Mamalis, S., 69–77 Melnick, M.J., 189
Mamalis, S.A., 71 Melville, R., 358
Index 545
Menezes-Filho, N., 125 Müller, G.J., 83

Mentel, G., 97 Munn, J., 32
Merriam, S.B., 395 Munro, L., 358
Mesquita, B., 462 Munteanu, C., 189
Mester, L.J., 287 Muntinga, D.G., 495, 496, 498
Metaxas, V., 287 Munuera, J.L., 71
Metrick, A., 447 Mursztyn, M., 113, 115, 116, 121
Meulenberg, M.T.G., 70 Murtarelli, G., 463
Meybeck, A., 70 Musa, H., 212
M’henni, H., 380 Musová, Z., 212
Michailidis, G.P., 483 Muthaiyah, S., 71
Michalis, S., 77 Myers, S.C., 447
Midgley, D.F., 513 Mylona, I., 69–77
Mihov, I., 94 Mylonakis, J., 189
Mihret, D., 358
Miles, J., 98
Miller, D., 270 N
Miller, D.J., 511 Naczyk, M., 97
Miller, S.M., 4 Nadiri, I.M., 478
Mills, J., 395 Nafoussi, G., 234–246
Millstein, I.M., 212 Nagel, N., 268
Mirkina, I., 348 Naiker, V.I.C., 362
Mirzoeff, N., 461 Na, K., 148, 153
Mishra, P., 452 Narayanan, A., 452
Mitchell, W., 148 Narayan, P.K., 381
Mitchell, W.C., 3 Nash, R.C., 448
Mitchell, W.J., 461 Nasr, A.B., 4
Mitková, L., 96 Nasser, I.N., 313
Modimogale, L., 510 Navas, L., 164
Mohammed, T., 81–92 Navissi, F., 362
Mohanty, S., 313 Nawaser, K., 45, 52
Mohd Suki, N., 71 N’Diaye, P., 82, 84, 87, 88
Molla, A., 511 Neal, T.L., 362
Mondragón-Vélez, C., 287 Negreiros, J., 460, 461
Money, A.H., 530 Neiger, B.I., 77
Monovasilis, T., 527–533 Nelson, C.R., 17
Moolman, E., 4, 7, 8, 18, 26 Nelson, R., 148
Moon, J., 236 Nerantzidis, M., 364
Moore, J., 287 Neulinger, A., 189
Moorman, M., 495 Newey, W.K., 384
Mora-Monge, C.A., 510 Ng, M., 495
Moreira, M.T., 71 Ngo, L.V., 512
Moreno-Dodson, B., 175 Niehm, L.S., 497
Morgan, N.A., 513 Nikkinen, J., 300
Moul, C.C., 319, 320 Niklis, D, 379–387
Mountford, A., 83 Nikolopoulos, K.I., 287
Moustakli, G., 531 Nikulin, E., 44
Moustakli, S., 527–533 Niu, L., 236
Mozas, M.A., 510 Nkusu, M., 287
Mužík, J., 202 Noddings, N., 235
Mukerji, B., 497 Nordhaus,W.D., 124
Mulero, O., 77 Norris, J.R., 529
Muller, E., 58 North, D.C., 393
546 Index
Notta, O., 509–524 Park, M.S., 367

Nowak, S., 115 Park, S.H., 313, 326
Ntanos, A., 77 Pasiouras, F., 483
Ntanos, S., 77 Passing, H., 253
Nyberg, H., 4, 5, 15 Patatoukas, K., 367
Patel, A., 448
Patro, A., 45
O
Patsios, A., 391–404
Obstfeld, M., 412
Paul, R., 235
Oegg, B., 348
Pavlidis, S., 71, 72
Oh, J., 497
Payne, A., 33
Oja, G., 250
Payne, J.E., 380
Olbrys, J., 110–121
Pazarskis, M., 364
O’Looney, J.A., 512
Pease, D.G., 189
Olsen, B., 148
Peasnell, K.V., 362
Olvera, R.M., 358
Peck, H., 33
Omri, A., 380, 381
Pegkas, P., 482
Ondrejka, R., 158
Pellegrino, G., 148
O’Reilly, C. (2013), 45
Peltier, J.W., 494
O’Rourke, K., 412
Peluso, A.M., 495
Orshansky, M., 250
Penceliah, S., 34
Osterwalder, A., 47
Peréz, J., 159
Osterwald-Lenum,M., 384
Pérez-Sánchez, M., 71
O’Sullivan, C., 34
Peris-Ortiz, M., 326
O’Sullivan, N., 110
Perotti, R., 82, 174
O’Sullivan, T., 34
Perron, P., 383
Oswald, D., 97
Persson, T., 125
Ouyang, X., 381
Pesaran, H., 287
Ozaki, R., 71
Peszynki, K., 511
Ozturk, I., 380
Peteraf, M., 45
Peters, G.F., 358
P Petrakis, E., 58
Paape, L., 358 Petrakos, G., 124–132
Paci, R., 326 Pham, V.-C., 164
Page, R.A., 71 Phillips, P.A., 512
Paim, L., 71 Phillips, P.C., 383
Palepu, K.G., 448 Phillips, V.T.J., 529
Pammolli, F., 148 Pickett-Baker, J., 71
Panagiotis, A., 189 Piger, J., 17
Panoy, G., 391–404 Pigneur, Y., 47
Pansari, A., 33 Pike, B.J., 358
Papachristou, A., 364 Piloiu, A., 287
Papadogonas, T., 293, 409–419 Piotrowski, P., 189
Papandreou, A.A., 125 Pithers, R.T., 235
Papathanasopoulos, S., 459, 460 Pittayachawan, S., 511
Papík, M., 95–121 Pizzetti, M., 463
Papinniemi, J., 148 Plaksiy, O., 484
Paravantis, J.A., 387 Plosser, C.I., 287
Parisi, M., 148 Pólya, A., 158
Park, C.W., 366, 374 Polychronopoulos, G., 484
Parker, D., 34 Pomarici, E., 71
Parker, R.A., 252 Pompe, J., 32
Parker, S., 358 Poole, S.M., 32
Park, H.Y., 358 Poon, J.P.H., 43
Index 547
Pope, P.F., 362 Rezaee, Z., 357, 359

Porcari, A., 159 Rezitis, A., 483
Porter, D.C., 10, 11 Ribal, J., 71
Porter, M., 58 Riccaboni, M., 148
Porter, M.E., 328 Richard, P., 381
Powell, P., 510 Richter, N., 70
Prasad, A., 287 Riddell, W.C., 202
Prawitt, D.F., 358 Ridinger, L., 189
Preiss, K., 268 Rigas, K., 76
Priporas, C.V., 76 Rinaldi, L., 287
Proano, C.R., 2 Rioux, M.C., 496
Prodromidis, K., 128 Ristvej, J., 158
Prokop, J., 58–66 Rivas, S.F., 235
Prucha, I.R., 302, 303 Roberts, N., 33, 269, 270
Prydz, E.B., 251 Robinson, R., 71
Przytula, M., 392 Robinson, S., 471, 478
Pursche, B., 43 Robledo, J.C., 159
Robson, P., 148
Rodrigue, M., 203
Q
Röell, A., 358
Quagliariello, M., 287
Rogoff, K., 124, 125, 287
Roll, R., 109–114, 116, 120
R Romani, S., 495
Raacke, J., 496 Romenti, S., 463
Radbourne, J., 34 Romer, D., 471, 476, 479
Rahman, K., 463 Romer, P., 58, 328
Rahman, M., 496 Rontos, K., 124–132
Rajan, R., 287, 452 Root, P.S., 347
Rajan, R.G., 447 Roper, S., 148
Raktham, W., 494 Rose, A.K., 412
Ramadhan, D., 188 Ross, A.S., 460
Ramadhan, S., 188 Ross, S., 432
Ramanathan, R., 513 Rouah, F., 434
Rana, N.P., 494, 497 Roubini, N., 125
Rao, B.B., 381 Rouse, M., 137
Rao, R., 148–150, 153 Rowntree, B.S., 250
Rasheed, A.M.A., 269 Rupley, K.H., 360
Rashid, M.A., 511 Russel, G.W., 189
Rault, C., 380 Ryan, R.M., 189
Ravallion, M., 250, 251
Ravanas, P., 32
Rawjee, V.P., 34 S
Ready, M.J., 11, 113, 120 Saboori, B., 381
Rea, L.M., 252 Saczewska-Piotrowska,
˛ A., 249–263
Rech, G., 4, 5 Sadka, R., 110, 120
Redding, S., 480 Sadorsky, P., 381
Redlick, C.J., 174 Saffu, K., 510
Redman, A., 70 Saiz, C., 235
Redman, E., 70 Sajdak, M., 268
Redman, R., 50 Sakurai, S.N., 125
Reed, D., 448 Salas, V., 287
Reinhart, C.M., 83, 287, 412, 415 Salterio, S.E., 358
Reisch, L., 70 Samsioe, E., 463, 466
Reuer, J.J., 52 Sanchez, R., 268
548 Index
Sánchez, S., 363 Sharon, J.S., 512

Sanchis-Arellano, A., 287 Sharp, N.Y., 358
Sanchis-Arellano, L., 287 Shebanina, O., 352
Sanjuán, N., 71 Sheehan, K., 493
Santi, C., 149 Shelton, W.S., 360
Santoleri, P., 149 Shi, M., 124, 125, 128
Santos, M.E., 250 Shin, W., 137
Sapienza, H.J., 45 Shin, Y., 137
Sapriza, H., 213 Shleifer, A., 58
Sarala, R.M., 269 Shmueli, G., 252
Sarantis, N., 4, 5, 8, 13, 18 Shojai, S., 347
Saraouglu, H., 97 Shugan, S.M., 319, 320
Saravelos, G., 412 Shukla, S., 452
Sarens, G., 358 Shyam, R., 137
Sari, R., 381 Siardos, G., 69
Saurina, J., 287 Sibert, A., 124, 125
Saxunová, D., 96 Šíbl. D., 159, 160
Scarpato, D., 70 Siegrist, M., 72
Scheinkman, J., 58 Sifaki, E., 461
Schiantarelli, F., 148, 174 Sifodaskalakis, E., 483
Schlegelmilch, B.B., 71 Sikora, T., 267–282
Schmid, M., 213 Simpson, H., 480
Schneider, A., 358 Simpson, M., 513
Scholes, M., 421, 422, 431, 432 Sims, C.A., 82
Schollaert, E., 236 Singh, A., 448
Schöps, J.D., 462 Singh, M., 361
Schott, J.J., 348 Singh, T., 4, 5, 26
Schreyogg, G., 45 Singh, Y.N., 137
Schuermann, T., 287 Sinkovics, R.R., 71
Schultz, D.E., 494 Šipková, K., 203
Schultz, P., 114 Siskou, T., 469–489
Schumpeter, J., 147, 152 Skiera, B., 495
Schwartz, R., 460 Škvareninová, D., 212–229
Secchi, A., 148 Slevin, D.P., 270, 274
Segal, R., 347 Sloan, L.R., 189
Segarra, A., 148, 149, 153 Sloan, R.G., 362
Šeligová, M., 199–208, 297–309 Smit, E.G., 495
Sembenelli, A., 148 Smith, C., 71
Sempere-Ripoll, F., 148 Smith, D.E., 512
Sen, A., 417 Smith, E.R., 462
Sen, H., 174, 175 Smyth, R., 381
Seppi, D.J., 110, 111 Soden, R., 235
Serrano-Bedía, A.M., 326, 340 Soh, D.S., 358
Severgnini, B., 481 Solomon, M.R., 497
Sfakianakis, G., 285–295, 409–419 Solow, R., 471
Shahbaz, M., 380, 381 Song, B.Y., 262
Shamma, D.A., 462 Song, C.J., 360
Shane-Simpson, C., 460 Song, X., 202
Shank, M.D., 189 Soonawalla, K., 216
Shapiro, C., 513 Sosa, O., 97
Shareef, M.A., 497 Souiden, N., 496
Sharma, S.S., 381 Soukopová, J., 447
Index 549
Sousa, R.M., 83, 174 Syriopoulos, C., 481

Soytas, U., 381 Szychta, A., 392
Spanos, L., 361
Sparkes, A., 510
Spathis, C., 357–373 T
Spector, P.E., 74 Taak, R., 452
Spiegel, M.M., 412 Tabachnick, B. G., 192
Spulber, D.F., 513 Tabellini, G., 125
Srivastava, R., 512 Táborecká-Petrovičová, J., 135–146
Srivastava, R.P., 358 Taktak, B., 287
Stahl, B.C., 159 Tamagni, F., 148
Staikouras, C., 474, 482 Tamazian, A., 381
Stakanov, R., 346–355 Tamburi, L., 32
Stake, R.E., 395 Tamburri, L., 32
Stamatiou, P., 379–387 Tan, B.W., 381
Standing, C., 513 Tang, C.F., 381
Stavrianea, A., 459–466 Tangeland, T., 71
Stavytskyy, A., 352 Tang, W., 58
Stefano, G.D., 45 Tanner, C., 71
Steiner, B., 70 Tarba, S.Y., 268, 269
Štencl, M., 447 Tastan, H., 11, 12, 23, 24
Sternberg, R., 326 Tatham, R., 334
Stern, D.I., 381 Tatham, R.L., 191
Stern, G., 287 Taubenfeld, H.J., 347
Steurs, G., 58 Teece, D.J., 44, 46, 49
Stewart, J., 358 Teegen, H.U.S., 347
Stiglitz, J.E., 417 Teräsvirta, T., 4, 5, 8, 13–15, 18, 20,
Stockdale, R., 513 21, 25
Stofko, S., 159 Teruel, M., 148, 149, 153
Stofkova, Z., 159 Thackeray, R., 77
Stoll, H.R., 113, 114 Thambiah, S., 71
Stout, D., 400, 401 Theil, H., 124
Streimikiene, D., 382 Thelwall, M., 460
Strohsal, T., 2 Theodosis, A., 463
Stuart, T.E., 45, 46 Theodoulides, L., 234–246
Stulz, R.M., 213 Thirlwall, A.P., 471, 479
Subrahmanyam, A., 110 Thistle, P.D., 293, 415
Subramaniam, N., 358 Thøgersen, J., 70, 71
Su, C.H.J., 71 Thomas, B., 510
Suddaby, R., 203 Thomas, L., 49
Suggett, P., 137, 142 Thomas, W.B., 360
Sümer, K.K., 347 Thorley, S., 24
Summers, L.H., 452 Thornton, M.A., 347
Sumner, A., 251, 258 Tinbergen, J., 124
Sumner, E.M., 466 Tiwari, A. K., 380
Sundar, S.S., 497 Tkacz, G., 4, 5
Sutton, G., 287 Tobler, C., 72
Svensmark, H., 529 Tödtling, F., 341
Svensson, J., 124, 125, 128 Tokarčíková, E., 202
Swan, T.W., 471 Tomar, S., 449
Sweeney, A.P., 362 Topcu, M., 381
Swift, J., 71 Torreguitart-Mirada, C., 511
Synek, M., 161 Trabelsi, A., 4
550 Index
Trail, G., 188 van Gelder, T., 235

Trandafir, M., 202 Van Halderen, G., 460
Tran, D.T., 164 Vanhonacker, F., 70–72
Trautwein, F, 46 Van Leeuwen, G., 461
Trenz, O., 447 Van Loo, E.J., 70
Treutler, M., 287 Vanstraelen, A., 357
Trigeorgis, L., 47, 52 Varian, H.R., 513
Trippl, M., 341 Varsakelis, N., 326
Trovato, G., 148 Vavoura, C., 124–132
Trzcinka, C., 113, 115 Vavouras, I., 124–132
Trzcinka, C.A., 113, 115 Vecchio, R., 71
Tsai, C.H.K., 71 Vedernikov, A., 44
Tsaklaganos, A., 394 Veeman, M., 70
Tsalas, A.I., 287 Veiga, F.J., 125
Tsamadias, C., 481, 482 Veiga, L.G., 125
Tsimaras, M., 394 Velentzas, I., 391–404
Tsionas, M., 287 Venkatesan, R., 460
Tsipouridou, M., 357–373 Venter, P., 421–444
Tsipouri, L., 361 Verain, M., 71
Tsou, H., 512 Verbeke, W., 70, 71
Tsounis, N., 469–489, 531 Verma, R., 381
Tsui, J.S., 361, 363 Vermeersch, L., 461
Tsyganov, S., 158 Vermeir, I., 71
Tureckiová, M., 202 Vermeulen, R., 412
Turkekul, B., 381 Verona, G., 45
Turrini, A., 32 Veteška, J., 202
Turut, S., 460 Viana, L.F., 361
Tushman, M., 45 Vilceanu, M.O., 71
Tuten, T.L., 497 Vis, F., 460
Visschers, V.H., 72
Vitters, G., 71
U Viturka, M., 159
Uhlig, H., 83 Vivarelli, M., 148, 152
Ukaegbu, B., 299 Vlachvei, A., 493–505
Ullman, J. B., 192 Vlisma, A., 394
Ulrich, K., 148 Vodák, J., 202
Umans, T., 358 Vokurka, J.R., 268
Usai, S., 326 Völckner, F., 313
Volpin, P., 449
von der Hardt, G., 403
V VonWyss, R., 110, 112
Vafeas, N., 361 Voola, R., 496
Valentini, C., 463 Vorhies, D.W., 513
Valica, M., 159 Voss, G.B., 32
Vallelado González, E., 213 Voss, Z.G., 32
Vamvakidis, A., 481 Vouldis, A., 287
Van Bree, M., 44 Voutsinas, I., 481, 482
Vančo, M., 234 Výrostová, E., 159
Vandenbroucke, A., 461
Van de Poel, K., 357
van de Walle, D., 250 W
Van Dijk, D., 4 Wagle, U.R., 251, 258
van Dijk, M.A., 115 Wagner, C., 466
Index 551
Wagner, S., 360 Wood, D.A., 358

Wahlen, J.M., 362 Wright, A.M., 362
Wai, P.S., 4, 5, 15, 25 Wu, J., 360
Walker, J.-H., 510 Wung, S.L., 472
Walker,W.J., 189 Wynn, J.P., 358
Wallensteen, P.A., 347
Wallgren, C., 71
Wallnau, L.B., 200 X
Walsh, J., 148 Xanthakis, M., 361
Wang, C.C., 360 Xia, D., 2
Wang, C.J., 448 Xiao, X., 58
Wang, F., 313 Xia, Y., 58
Wang, L., 46 Xie, B., 361
Wang, Q., 512 Xu, L., 58
Wang, S., 381 Xu, Q., 497
Wang, Y., 529 Xu, S., 511
Wan, L., 511
Wannapan, S., 159
Wann, D.L., 189 Y
Waterman, D., 319, 321 Yahya, M., 188
Watts, H., 250 Yair, K., 32
Watts, R.L., 361 Yang, B., 497
Weber, S., 380 Yang, J., 347, 348
Weber, Y., 268, 269 Yasmin, T., 380
Wege, E., 495 Yasuda, T., 148
Wegener, D.T., 191, 192 Yeaple, S.R., 480
Weil, D.N., 479 Yenawine, P., 461
Weiner, S., 287 Yen, Y.Y., 71
Wennberg, K., 148 Yi, H., 360
Wenner, L.A., 190 Yildirim, N., 11, 12, 23, 24
Wermelinger, M., 158 Yin, R.K., 395, 396
West, K.D., 384 Yoo, C., 497
Whelan, C.T., 250 Young, A., 478
Whitten, S., 54 Young, S., 362
Whittington, O.R., 360 Yu, H., 497
Wigley, T.M.L., 528 Yusuf, A., 188
Wiid, J.A., 189
Wileman, R.E., 461
Willenborg, M., 363 Z
Williams, J., 530 Zaghdoud, O., 381
Williams, K.C., 71 Zahra, S.A., 45, 49
Williams, L.J., 111, 112 Zaidi, M.A., 250
Williams, P., 136 Zajac, E.J., 46
Wilmott, P., 422, 425, 426 Zalega, T., 71
Wilson, H., 512, 513 Zammit, A., 448
Wilson, P., 71 Zang, I., 58
Winter, S., 148 Zanoli, R., 512
Wirtz, J., 136 Zappavigna, M., 460
Witkowska, D, 97 Zeng, Y., 511
Wölfing Kast, S., 71 Zhang, J., 58
Wolker, D., 236 Zhang, L., 362
Wolters, J., 2 Zhang, M., 495
Won, J., 189 Zhang, Y., 313
552 Index
Zhao, K., 313 Zikos, V., 58

Zhu, H., 313 Zilibott, F., 480
Zhu, J., 434 Zimmerman, J.L., 361
Zhu, K., 511 Zivot, E., 17
Zhu, Y.Q., 498 Zopounidis, C., 363

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Springer Proceedings in Business and Economics

ISSN 2198-7246 ISSN 2198-7254 (electronic)

Kastoria, Greece Nicholas Tsounis

Kastoria, Greece Aspasia Vlachvei

Forecasting the South African Financial Cycle: A Linear

The Mechanism of Political Budget Cycles in Greece . . . . . . . . . . . . . . . . . . . . . . . . 123

Movies Performance: Empirical Evidence from Italy . . . . . . . . . . . . . . . . . . . . . . . 311

Factors Affecting e-Marketing Adoption and Implementation

Milan Christian de Wet

Keywords Non-linear forecasting · Financial cycles · Markov switching

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 1

significant amount of attention since the initial groundwork on cyclical research by

Despite very limited to no work done on forecasting aggregate financial cycles,

to comprehensively identify an optimal forecasting method for business cycles.

3 Data Description and Methodology

3.1 ARIMA Methodology

The autoregressive integrated moving average (ARIMA) model where AR refers to

ASAFCt = c + ∅1 ASAFCt−1 + ∅p ASAFCt−p + β1 μt + βq μt−q (1)

ASAFCt+1 = c + ∅1 ASAFCt + ∅p ASAFCt−p + β1 μt + βq μt−q (2)

To determine I, the integration level of dependent variable Yt , a Dickey-Fuller

3.2 Non-linear Models

3.2.1 MS-AR Models

yt = βs1 (yt−1 + yt−2 + · · · + yt−k ) + βs2 (yt−1 + yt−2 + · · · + yt−k ) + εt

yt = cts + βs1 (yt−1 + yt−2 + · · · + yt−k ) + βs2 (yt−1 + yt−2 + · · · + yt−k ) + εt

where Cts is a state-dependent, s, intercept, allowing for a state-dependent mean.

yt − μst = cts + βs1 (yt−1 + yt−2 + · · · + yt−k − μst−1 ) +

contraction to an expansion and p22 depicts the conditional probability of remaining

3.2.2 STAR Models

Following Teräsvirta et al. (2005), the STAR model is specified as follows:

Vt = β0 + β1 wt + β2 wt st−d + β3 wt st−d

H0 : β2 = β3 = β4 = 0

The selection rule states that if H0 : β 1 = 0 β 3 = β 2 = 0 has the smallest p-

The LSTAR model allows asymmetrical adjustments to the non-linear process.

According to Enders (2004), the ESTAR model is symmetrical if ASAFCt − 1 = c,

Since λ is constant, movements of γ towards 0 or ∞ make the ESTAR model a

3.3 Determining Forecasting Performance

Table 1 Phillip-Perron unit Breakpoint Augmented Dickey-Fuller test results

4 Results, Findings, and Discussion

4.1 ARIMA Model Outputs

Table 3 ARIMA results Variable Coefficient P-value

Table 4 Outputs rendered by Coefficient P-value

4.2 STAR Model Outputs

Table 5 Smooth threshold Null hypothesis P-value

Table 6 Terasvirta Null hypothesis P-value

Table 7 P-values for the d lag P-value

Table 8 Outputs rendered by the LSTAR model

4.3 MS-AR Model Outputs

Table 9 Estimation output Variable MSMV(2)-AR(3)

4.4 Forecasting Performance Evaluation

Table 10 Forecasting performance measures

Interestingly, evidence indicates that the linear AR(4)MA(4) model outperforms

A.1 Appendix: Selection Criterion for Various MS-AR

HQC AIC SIC

Baharumshah, A. Z., & Liew, V. K. (2006). Forecasting performance of exponential smoothing

Angela Besana and Annamaria Esposito

Abstract The prompt and cost-effective segmentation of audiences and stakehold-

Keywords Economics · Marketing · Classical music · USA · Cluster analysis

A. Besana () · A. Esposito

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 31

fundraising-oriented audiences and segment them (Esposito, 2016; Roberts, 2014;

2 Relationship Marketing in US Opera Houses

Relationship marketing is a strategy designed to foster stakeholders’ engagement

4 Key Findings and Discussion: The Fundraiser

K-means clustering of the above-mentioned sample of 158 is significant for 120