25-08-2017, 09:32 PM
Studying the Role of Financial Risk Management on Return on Equity (ROE)
Studying the Role.docx (Size: 1.09 MB / Downloads: 28)
INTRODUCTION:
In this article three instruments of bank risk management are represented by means of financial ratios consisting of interest rate risk, capital risk and risk
of natural hedging. So the basic problem in this paper is the impact of risk management on stockholders’ wealth. Stockholders wealth is measured by Return on Equity (ROE).Risk directly affects the finances of the
organizations and decrease the income flows and case capital loss .it affect the economy at macro and micro levels Many of the researchers have recommended that risk must be managed but not destroyed Therefore, paying attention to risk management is one of the main policies in each economy.
Problem statement:
The basic problem in this paper is the impact of risk management on stockholders wealth.
OBJECTIVE:
The objective of this article is to study the effective factors in maximizing stockholders wealth.
In order to analyses the relationship between interest rate risk, natural hedging risk, &capital risk with ROE three hypotheses are made
H1: There is a significant relationship between interest rate risk and ROE in banks.
H2: There is a significant relationship between natural hedging risk and ROE in banks.
H3: There is a significant relationship between capital risk and ROE in banks.
According to these hypotheses, our regression model is as follows:
ROE=C1 +C2*CA +C3*NH+C4*IR
In this article regression analysis has been used to test the existence of relationships among variables and significance of estimated models. This means that linear and non-linear relationships among financial ratios with stocks return have been examined to study significance level of coefficients of regression models. So, regression models are estimated by using E-views statistical software, and then significance of the regression model is tested through circumstantial evidence oft-test on 95% of confidence level. The Durbin Watson test has been used to examine auto-correlation of variables.
EMPERICAL RESULT:
Result of this article shows the P-Value of the coefficients of C3 and C4, which are diversification risk and credit risk, are lower than 5%; so, we can conclude from such data that there is a significant relationship between variables related to interest rate and diversification risk in services and ROE. Also, the amount of R2 is 56%. Durbin
Watson statistics are used to show auto-correlation among error tools. As a result, there is no auto-correlation test among error tools.
The value of F means rejection of H0, meaning that coefficients of the model are zero. As a result, CR, NH and IR have significant effects on ROE on significance level of 5%
CONCLUSION:
At the end we conclude that the bank managers and decision-makers are recommended to increase their ROE diversification of their services to attract new investors and increase their ROE. In this way, banks' capitals are increased, and it will be possible to offer better and more services again.Bank managers can use this issue as an advantage in the competitive market.