TITLE: PROFITABILITY OF A MULTI-PURPOSE COOPERATIVE AS AFFECTED BY INTERNAL CONTROL PRACTICES AND FINANCIAL STRATEGIES

VARIABLES: PROFITABILITY, INTERNAL CONTROL PRACTICES AND FINANCIAL STRATEGIES

1. Profitability

1.1. Simulacrum

Date Author Title Variables Methodology Findings and

Implications
2014 Kenneth E. An Empirical Independent: forced-choice instrument administered This study did not find any relationship
Aupperle Examination of Corporate Social to corporate CEOs between social responsibility and
Archie B. the Relationship Responsibility profitability.
Carroll between
and John D. Corporate Social Dependent: Specifically, varying levels of social
Hatfield Responsibility and Profitability orientation were not found to correlate with
Profitability performance differences.
http://amj.aom
.org/content/2
8/2/446.short
2011 Marijana Ćurak Profitability Independent The analysis of determinants of bank According to the obtained results, among
Klime Poposki Determinants of variables: profitability is based on the following internal factors of bank profitability, the
Sandra Pepur the Macedonian >Return on assets model: most important one is operating expense
Banking Sector - ROA management. Further, the profitability is
in Changing > Bank size ROA it =α +n ROA i ,t−l + β X ' it +uit influenced by solvency risk and liquidity risk.
Environment > Solvency risk Regarding the external variables, economic
> Liquidity risk where ROA it is the profitability of bank i growth, banking system reform and
> Credit risk at time t, with i = 1,…,N and t = 1,…,T. α concentration show significant effect on
> Fees income is a constant term. ROA i ,t −l is lagged bank profitability in the Republic of
> Operating Macedonia.
dependent variable. X ' it is set of
expense
explanatory variables. β is vector of
management
coefficients to be estimated. uit are error
>Concentration
> EBRD index terms that are assumed to be identically
and independently distributed with
> Economic
growth mean 0 and variance σ u2

As a dependent Regarding estimation we use

generalized methods of moments
 variable, in this (GMM) panel estimator. It is developed
paper the for dynamic panel models by Arellano
accounting-based and Bond (1991) and Arellano and Bover
profitability (1995). We employ two-step Arrelano
indicator of return and Bond GMM estimator.
on asset In order to test validity of the model,
(ROA) is used. two types of tests are performed. The
validity of instruments is tested by
Sargan test. It is a test of the
overidentifying restrictions with null
hypothesis that there is no correlation
between the instruments and the errors.
Accepting the null hypothesis means
that the chosen instruments are valid.
The second group of test refers to tests
of serial correlations in the differenced
residuals – (first-order (m1) and second-
order (m2) serial correlation). The
existence of the first-order serial
correlation in the differenced residuals
does not imply inconsistency of the
estimations. Namely, the condition for
consistency of coefficients estimations is
that there is no second-order serial
correlation in the differenced residuals.
2006 Roger Hallowell The relationships Independent: multiple measures of satisfaction, An estimate of the effects of increased
of customer Customer loyalty, and profitability customer satisfaction on profitability
satisfaction, satisfaction (assuming hypothesized causality) suggests
customer loyalty, Customer loyalty that attainable increases in satisfaction
and profitability: could dramatically improve profitability.
an empirical study Dependent:
profitability
2006 Lazaridis, Relationship Independent: We used a sample of 131 companies The results of our research showed that there is
Ioannis and Between Working working capital listed in the Athens Stock Exchange statistical significance between profitability,
Tryfonidis, Capital management (ASE) for the period of 2001-2004. The measured through gross operating profit, and
Dimitrios Management and purpose of this paper is to establish a the cash conversion cycle. Moreover managers
relationship that is statistically significant can create profits for their companies by
Profitability of Dependent:
between profitability, the cash conversion handling correctly the cash conversion cycle and
Journal of Listed Companies profitability keeping each different component (accounts
Financial in the Athens cycle and its components for listed firms in
the ASE. receivables, accounts payables, inventory) to an
Management Stock Exchange
 and Analysis, optimum level.
Vol. 19, No. 1,
January-June
2006
1998 JAIME A. MARKETS VS. Independent: Research results on a recent data base Research results on a recent data base
ROQUEBERT*, MANAGEMENT: MARKETS (COMPUSTAT), using variance (COMPUSTAT), using variance components
ROBERT L. WHAT ‘DRIVES’ MANAGEMENT components analysis (VARCOMP) analysis (VARCOMP) are presented that not only
PHILLIPS PETER PROFITABILITY? confirm most of the Rumelt (1991) findings, but
also suggest the existence of a corporate effect,
A. WESTFALL Dependent:
heretofore undetected.
profitability

1.2. Paraphrase

Author Original Paraphrased

Kenneth E. This study did not find any relationship between social Correlation between varied social orientation levels and performance
Aupperle, Archie responsibility and profitability. differences was not proven, hence relationship between social
B. Carroll and John responsibility and profitability was not apparent.
D. Hatfield (2014) Specifically, varying levels of social orientation were not found to
correlate with performance differences.
Marijana, Ćurak According to the obtained results, among internal factors of The study determined that the most significant indicator of bank
Klime Poposki, bank profitability, the most important one is operating expense profitability is operating expense management. Further, external
and Sandra Pepur management. factors such as economic growth, banking system reform and
(2011) concentration determine banks’ profitability. Among internal factors,
Further, the profitability is influenced by solvency risk and solvency risk and liquidity risk were also important indicators.
liquidity risk. Regarding the external variables, economic growth,
banking system reform and concentration show significant effect
on bank profitability in the Republic of Macedonia.
Roger Hallowell An estimate of the effects of increased customer satisfaction on Profitability
(2006) profitability (assuming hypothesized causality) suggests that
attainable increases in satisfaction could dramatically improve
profitability.

1.3. Review of Related Literature

There have been researches about profitability that were studied by Kenneth E. Aupperle, Archie B. Carroll and John D. Hatfield (2014), Marijana, Ćurak
Klime Poposki, and Sandra Pepur (2011), Roger Hallowell (2006), Lazaridis, Ioannis and Tryfonidis, Dimitrios (2006), and Jaime A. Roquebert , Robert L.
Phillips, and Peter A. Westfall (1998).
2. Internal Control Practices

2.1. Simulacrum

Date Author Title Variables Methodology Findings and

2009 HOLLIS ASHBAUGH- The Effect of SOX Independent: Lambert, Leuz, and Verrecchia [2007]
SKAIFE Internal Control Internal Control develop a model in a single-period
DANIEL W. Deficiencies on Deficiencies multisecurity CAPM setting that links the
COLLINSWILLIAM R. Firm Risk and quality of accounting disclosures and
KINNEY JR and Cost of Equity Dependent: information systems to firm risk and cost
RYAN LAFOND Firm Risk of equity. In the Lambert, Leuz, and
Cost of Equity Verrecchia [2007] framework,
accounting information system quality is
broadly defined to include not only the
disclosures the firm makes to outsiders,
but also the internal control systems
that a firm has in place. A key insight
from their analysis is that the quality of
accounting information and the systems
that produce that information influence
a firm's cost of capital in two ways: (1)
direct effects—where higher quality
accounting information does not affect
firm cash flows, per se, but does affect
market participants' assessments of the
variance of a firm's cash flows and the
covariance of the firm's cash flows with
aggregate market cash flows—and (2)
indirect effects—where higher quality
information and better internal controls
affect real decisions within the firm,
including the quality of operating
decisions as well as the amount of firm
resources that managers appropriate for
themselves.
2011 Jeong-Bon Kim, Byron Internal Control Independent: this study compares various features of
Y. Song, and Liandong Weakness and Internal Control loan contracts between firms with ICW
Zhang (2011) Bank Loan and those without ICW.
Contracting: Dependent:
Implications
After controlling for other risk factors,
we find that firms with internal control
deficiencies have significantly higher
idiosyncratic risk, systematic risk, and
cost of equity. Our change analyses
document that auditor-confirmed
changes in internal control
effectiveness (including remediation of
previously disclosed internal control
deficiencies) are followed by
significant changes in the cost of
equity that range from 50 to 150 basis
points. Overall, our cross-sectional and
intertemporal change test results are
consistent with internal control
reports affecting investors' risk
assessments and firms' cost of equity.
Our results show the following. First,
the loan spread is higher for ICW firms
than for non-ICW firms by about 28
basis points, after controlling for other
 Evidence from Bank Loan known determinants of loan contract
SOX Section 404 Contracting terms. Second, firms with more
Disclosures severe, company-level ICW pay
significantly higher loan rates than
those with less severe, account-level
ICW. Third, lenders impose tighter
nonprice terms on firms with ICW than
on those without ICW. Fourth, fewer
lenders are attracted to loan contracts
involving firms with ICW. Finally, our
within-firm analyses show that banks
increase loan rates charged to ICW
firms after their disclosure of internal
control problems and that banks
reduce loan rates after firms
remediate previously reported ICW.
2011 Dan Dhaliwal, Chris Internal Control Independent: We test the relationship between the We find that, on average, a firm's
Hogan, Robert Disclosures, Internal Control change in a firm's cost of debt and the credit spread on its publicly traded
Trezevant, and Monitoring, and Disclosures disclosure of a material weakness in an debt marginally increases if it discloses
Michael Wilkins the Cost of Debt Internal Control initial Section 404 report. a material weakness. We also examine
Monitoring the impact of monitoring by credit
rating agencies and/or banks on this
Dependent: result and find that the result is more
Cost of Debt pronounced for firms that are not
monitored. Additional analysis
indicates that the effect of bank
monitoring appears to be the primary
driver of these monitoring results. This
finding is consistent with the
argument that banks are effective
delegated monitors for the debt
market. The results of this study
suggest the need for future research,
particularly to test the differential
effects of monitoring on the cost of
debt compared to the cost of equity.
2010 Denise Dickins Frameworks for Independent: Using the CSA methodology in a start-up The CSAof the unit helps to illustrate
Margaret O’Hara establishing and Internal control operation, the process of identifying key some of the benefits of CSA, including
John Reisch evaluating business processes, risks to those increased awareness of organizational
internal controls: Dependent: processes, and controls to mitigate the objectives and the
 a primer and risks is explained, as is how feedback need for strong controls, development
case study from the CSA project results in of a sense of ownership of controls,
recommendations to improve internal early detection of risks, and increased
controls. effectiveness of controls. With these
types of benefits, and the relative
ease of conducting a CSA, this example
may encourage business organizations
to consider the use of CSA to
strengthen their internal control
structures.
1998 Curtis C. Verschoor A Study of The Independent: It identifies the 26.8 percent of the 500 The financial performance of these
Link Between a ethics largest U.S. public corporations that, in corporations ranks higher than that of
Corporation's their annual report to shareholders, those who do not at a significance
Financial Dependent: commit to ethical behavior toward their level of p = < 0.005, using the 1997
Performance and Financial stakeholders or emphasize compliance Business Week ranking which averages
Its Commitment Performance with their code of conduct. eight publicly-reported measures of
to Ethics historical financial performance. These
findings should motivate more
corporations to utilize the principles of
Social and Ethical Accounting, Auditing
and Reporting (SEAAR).

2.2. Paraphrase

Author Original Paraphrased

2.3. Review of Related Literature

3. Financial Strategies

3.1. Simulacrum

Date Author Title Variables Methodology Findings and

Implications
2002 Tze-Wei Fu Capital Growth, Independent: This paper examines the The results indicate a statistically positive
Mei-Chiu Ke Financing Source Financial source relationship between profitability relationship between profitability and
Yen-Sheng Huang and Profitability of and financial capital for 1,276 capital growth. When financial capital is
Small Businesses: Dependent: small firms in Taiwan over the further divided into debt and equity, the
 Evidence from Profitability period 1992–1997. results indicate a significantly positive
Taiwan Small relationship between profitability and
Enterprises equity financing, but a significantly
negative relationship between
profitability and debt financing.
Moreover, the profitability of small firms
is positively related to both the external
economic conditions and the firms’
previous profitability.
2003 M. Kabir Hassan, Ph.D. Determinants of Independent: Everything remaining equal, the The preceding empirical analysis allows
Abdel-Hameed M. Islamic Banking capital and loan regression was used us to shed some light on the relationship
Bashir, Ph.D. Profitability ratios between banking characteristics and
equity to total asset performance measures in Islamic Banks.
ratio First, the Islamic banks’ profitability
consumer and measures respond positively to the
short-term funding, increases in capital and negatively to loan
non-interest earning ratios. The results revealed that larger
assets, and equity to total asset ratio leads to more
overhead profit margins. This finding is intuitive
regulatory tax and consistent with previous studies. It
factors indicates that adequate capital ratios play
macroeconomic a weak empirical role in explaining the
environment performance of Islamic banks. Islamic
Banks’ loan portfolio is heavily biased
Dependent: towards short-term trade financing. As
Profitability such, their loans are low risk and only
contribute modestly to the bank profits.
Bank regulators may use this as an
evidence for prompt supervisory action.
Second, the results also indicate the
importance of consumer and short-term
funding, non-interest earning assets, and
overhead in promoting banks’ profits. A
high CSTF to total asset ratio is shown to
lead to low non-interest margins. The
counter intuitive finding about the
association between NNIM (net not
interest margin) and overhead suggests
that high profits earned by banks may be
appropriated in terms of higher wages
 and salaries. It appears that the expense
preference behavior appears to be
holding in the Islamic banking market.
Third, the results suggest that the
regulatory tax factors are important in
the determination of bank
18 performances. However, our findings
seem to suggest that reserve requirement
does not have a strong impact on the
profitability measures. Fourth, favorable
macroeconomic environment seems to
stimulate higher profits. Higher growth
rate of GDP seem to have a strong
positive impact on the performance
measures. However, per capita GDP seem
to have limited effect on performance.
Inflation rate and its interaction term
with GDP do not seem to have a
significant impact on performance.
Finally, the size of the banking system has
negative impact on the profitability
except net non-interest margin.

3.2. Paraphrase

Author Original Paraphrased

3.3. Review of Related Literature