CHAPTER 2 THEORITICAL FRAMEWORKS AND HYPOTHESIS DEVELPOMENT 2.

1 Theoretical Review A body of generally accepted findings has emerged in the institutionally more developed capital markets from the research on the topics of earning responses. Hagerman, Zmijewski and Shah (1984), Emmanuel (1984), Loh and Walter (1986), Ariff, Loh and Chew (1997) and Ball, Kothari and Watts (1993). All the above studies on the returns-to-earnings relation over the past 30 years have provided evidence that earnings and earning related information information include controlling for revenue Swaminathan and Weintrop (1991), firm size (Freeman 1987, Chaney and Jeter, 1993), leverage effect (Dhaliwal, Lee and Farger, 1991), auditor choice (Shamsher and Cheng, 2001, Teoh and Wong, 1993) and others determinants of returns-to-earnings relation. These studies found that the price adjustment for firm-specific variables revenue, firm size and debt-equity do have mixed effect in the returns-to-earnings relation. The traditional theory of financial intermediation is based on the critical function of commercial banks as the creators of financial contracts between deficit units and surplus units. More recent theories stressed the role of commercial banks as risk managers and liquidity providers. The theoretical foundation of banking industry is the systematic high leverage exposure of banks. There were many studies about the various risks in bank assetliabilities management. Pagano (2001), Palia and Portwer (2003) write about the issues in regulatory risk management of commercial banks. Their review of empirical tests in the banking literature suggests that financial intermediaries coordinate different aspect of risk (e.g. credit and interest rate risk) in order to maintain a certain level of total risk. Other studies in banking use optimal gap as done by Wertmore and Brick (1990). The loan loss disclosure were studied by Gibson (2000), Hasan and Wall (2000). 2.1.1 Abnormal Returns Theory

The determination of Abnormal Return (AR) is the important stage of event analysis. McKinlay (1997) outlines the stages of an event study and asserts that market model is the most suited one to calculate expected return of a security. 2.1.2 2.1.3 Standardized Unexpected Annual Earnings Theory Interest Risk Factor Theory Interest risk itself is the chance that changes in interest rates will adversely affect the value of an investment. Most investment lose value when the interest rate rises and increase when it falls. Gitman (Page 229, Principle of Managerial Finance, Twelve Edition). And 2 factors that is based from the Price Risk and Coupon Reinvestment Risk. Brown and Reily (Page 699, Analysis of Investment And Management of Portfolio, Nine Edition). 2.1.4 Liquidity Risk Factor Theory The chance that an investment cannot be easily liquidated at reasonable price. Liquidity is significantly affected by the size and depth of the market in which an investment is customarily traded. Gitman (Page 227, Principle of Managerial Finance, Twelve Edition). Lack of a counter party to trade within the time scale desired. Cuthberson and Nitzsche (Page 570, Financial Engineering) 2.1.5 Credit Risk Theory Credit risk is the risk induced from credit events such as credit rating change,restructuring, failure to pay, repudiation and bankruptcy etc. A more mathematical denition is given by Giesecke (2004): credit risk is the distribution of financial losses due to unexpected changes in the credit quality of a counterparty in a financial agreement.

2.1.6

Solvency Risk Theory

Solvency risk (Internal Liquidity) to indicate the ability of the firm to meet future short-term financial obligations. Usually is used compare near-term financial obligations, such as account payable or notes payable. Solvency requirement : the equity-assets ratio, exceeds the proportion of bad debt. Cuthberson and Nitzsche (Page 570, Financial Engineering) 2.2 Theoretical Framework

Interest Risk Factor

Liquidity Risk Factor Credit Risk Factor Cumulative Abnormal Returns (CAR)

Solvency Risk Factor

Standardized Unexpected Annual Earnings

2.3

Hypothesis Development

Based on theoretical review or theoretical framework, so we tried to describe the hypothesis that to be tested the truth, whether the research results will accept or reject the hypothesis, as follows : H01 : No influence on standardized unexpected annual earnings toward on cumulative abnormal returns over a 12 month. H02 : No influence on interest risk factor toward on cumulative abnormal returns over a 12 month. H03 : No influence on liquidity risk factor toward on cumulative abnormal returns over a 12 month. H04 : No influence on credit risk factor toward on cumulative abnormal returns over a 12 month. H05 : No influence on solvency risk toward on cumulative abnormal returns over a 12 month.