This finance seminar course aims to develop students' skills in critically appraising empirical and theoretical finance literature. The course outline covers research philosophies, designs, and methodologies commonly used in finance. Students will review academic journals and critique their methodologies. Course evaluation is based on participation, written reviews, assignments, and a final exam. Key journals reviewed include the Journal of Finance and Journal of Financial Economics. Students will learn quantitative research methods like regression analysis and qualitative methods to identify gaps in the literature.

1. Finance Seminar
BAC 906

2. Expected Learning outcomes
 Critically appraise empirical and theoretical
literature in finance by undertaking various
types of appraisals;
 Methodologically appraise journal papers,
seminal articles and other academic material;
 Theoretical appraisal of journal papers,
seminal articles and other academic material;
 Conceptual appraisal of journal papers,
seminal articles and other academic material;
 Identification of empirical and theoretical
literature gaps in journal papers

3. Course Outline
 Finance research philosophies;
 Research designs in finance;
 Review of journals in finance and critique of
methodology used;
 Theoretical literature gaps;
 Methodological perspectives in accounting and
finance
1) Probit model,
2) Logit model,
3) Panel analysis,
4) multiple regression,
5) Events study Heckman selection method,
6) Data Envelope analysis,

4. Course evaluation
Participation and presentation 10%
Written article reviews 10%
Assignments 20%
Final Examination 60%
Total 100%
Course Journals
 Review of Asset Pricing Studies
 Journal of Monetary Economics
 Review of Economics and Statistics
 Quarterly Journal of Economics and Finance
 Journal of Economic Theory
 Journal of Finance
 Journal of Financial Economics
 Review of Financial Studies
 Journal of Banking and Finance
 Journal of Applied banking and Finance
 Review of Empirical Finance
 Journal of Business
 Journal of International Business
 Journal of Economics and Business
 Journal of Policy Modeling
 Review of Development Finance
 Merton, Robert C. (1973): An Intertemporal Capital Asset Pricing Model, Econometrica 41, 867-87.

5. Lecture one - Research Philosophies
 This is a basic belief system or world view that guides
the investigation. Refers to the development of
knowledge and the nature of that knowledge.
 Philosophical approach enables the researcher to decide
which approach should be adopted and why
 There are several major questions that require significant
consideration by researchers e.g. How to research?'
'What to research?'‘ Why research?‘
1. What to research- may be for various reasons, such as a
researcher's own academic interests?
2. Why research?' may be to look for the that 'truth' does it
exist not exist.
 Developing a philosophical perspective requires that the
researcher make several core assumptions concerning
two dimensions: the nature of society and the nature
of science (Burrell and Morgan 1979).
 The sociological dimension involves a choice between

6. cont
 Society's evolvement is seen as either arising from
the status quo or from what can be. In a regulatory
view of society, the researcher assumes that society
evolves rationally
 Society is viewed as unified and cohesive, whereas
the sociology of radical change views society as in
constant conflict as humans struggle to free
themselves from the domination of societal
structures
 The other dimension, science, involves either a
subjective or an objective approach to research;
these two major philosophical approaches are
delineated by several core assumptions concerning
ontology (reality), epistemology (knowledge),

7. cont
 Objectivism and subjectivism have been described as a
continuum's polar opposites with varying philosophical
positions aligned between them (referred to as ontology)
Objectivist
 Quantitative
 Positivist
 Scientific
 Experimentalist
 Traditionalist
 Functionalist*
Subjectivist
 Qualitative
 Phenomenological
 Humanistic
 Interpretivist

8. The
subjectivist
approach to
social
science
The
objectivist
approach to
social
science
Assumption
Nominalism
Anti-positivism
Voluntarism
Ideographic
Ontology
Epistemology
Human Nature
Methodology
Realism
Positivism
Determinism
Nomothetic

9. cont
 The first assumption ontology, relates to the nature of
reality, i.e, what things, if any, have existence or whether
reality is "the product of one's mind“ (Burrell and Morgan
1979: 1).
 The researcher's view of reality is the cornerstone to all
other assumptions
 The second assumption, epistemology, concerns the
study of the nature of knowledge, i.e "How is it possible.
Knowledge can be identified and communicated to
others
 The third assumption, concerning human nature,
involves whether or not the researcher perceives man as
the controller or as the controlled
 Methodology (forth assumption), is the researcher's
tool-kit - it represents all the means available to social

10. Subjectivist
Approaches
to Social
Science
Objectivi
st
Approac
hes
to Social
Science
Core
Ontoiogi
cail
Assump
tions
(Reaiity)
Reality as a
projection of
human
Imagination
Nominalism
Reality as
a
social
constructio
n
Reality as
a realm of
symbolic
discourse
Reality as
a
contextua
l
field of
informatio
n
Reality
as a
concrete
Process
Reality
as a
concrete
Structure
Realism
Basic
Epistem
oiogical
Stance
(Knowle
dge)
To obtain
phenomenol
ogical
insight,
revelation
Anti-
positivism
To
understand
how social
reality is
created
To
understan
d
patterns
of
symbolic
discourse
To map
contexts
To study
systems,
process,
change
To
construct
a
positivist
Science
Positivis
m
Assump
tions
About
Man as pure
spirit,
consciousne
Man as a
social
constructor
Man as
an
actor; the
Man as
an
informatio
Man as
an
adaptor
Man as a
Respond
er

11. Epistemology
 Epistemology concerns what constitutes acceptable
knowledge in a field of study.
 Views of what to consider important in the study
Types of research philosophies
i. Positivism
ii. Realism
iii. Interpretivism
iv. Pragmatism
Positivism
 Positivist approach to research is based on knowledge
gained from 'positive' verification of observable
experience rather than, for example, introspection or
intuition.
 Scientific methods or experimental testing are the best way
of achieving this knowledge.

12. Beliefs
This approach holds certain beliefs:
Prediction and control
 that there are general patterns of cause-and-effect that
can be used as a basis for predicting and controlling
natural phenomena. The goal is to discover these
patterns.
Empirical verification
 that we can rely on our perceptions (observations or
measurements) of the world to provide us with accurate
data.
Research is value-free
 provided a strict methodological protocol is followed,
research will be free of subjective bias and objectivity
will be achieved.

13. Methodology
 Positivist approaches rely heavily on experimental and
manipulative methods. These methods ensure that there is a
distance between the subjective biases of the researcher and
the objective reality she or he studies.
Criteria for 'Good' Research
 The positivist position is grounded in the theoretical belief that
there is an objective reality that can be known to the
researcher, if she or he uses the correct methods and applies
those methods in a correct manner.
Research is evaluated using three criteria:
 Validity - the extent to which a measurement approach or
procedure gives the correct answer (allowing the
researcher to measure or evaluate an objective reality)
 Reliability - the extent to which a measurement approach or
procedure gives the same answer whenever it is carried out
 Generalizability - extent to which the findings of a study can

14. b) Interpretivism
 Its based on understanding human nature and
their varying role as social actors. It interprets
the social roles of other individuals in
accordance with our own set of
meanings/perspectives. This particular position
has been taken by the “feelings” researcher,
who is keen in analyzing human emotions and
social role. For example, interpreting the
psychological strategies undertaken by
suppliers and demands of
consumers. Naturalistic use the methods like,
interview ,observation and analysis of existing
texts. A qualitative approach is applied

15. C) Realism
 Realism refers to scientific inquiry emphasizing on the
reality projected by our sense as truth. It believes that
objects have an independent existence from human
mind. This element is more related to positivism.
However, the view contrasts between direct realist and
critical realist.
d) Pragmatism argues that the most important
determinant of the epistemology, ontology and axiology
you adopt is the research question – one may be more
appropriate than the other for answering particular
questions. Moreover, if the research question does not
suggest unambiguously that either a positivist or
interpretivist philosophy is adopted

17. Chapter 2
Research designs
 A research design is a procedural plan that is adopted by a
researcher to answer questions in a valid way.
 It determines the type of analysis one should carry out to
get the desired results.
 The extent of the design being good or bad will depend on
whether one is able to get the answers to the research
questions. If the design is poor, the results of the research
will not be promising.
 How do you go about getting a good research design
that will provide sufficient answers to your research
work? The best approach will be to examine different
types of research designs, list down the strengths and
weaknesses and then make your decisions.
 You should have a good understanding of your
research/problem such as the method that you would like

18. cont
 It is necessary for you to choose a design that will give you
the optimized result over factors that explain the research
results obtained
THE FUNCTIONS OF RESEARCH DESIGN
Generally, we can divide the functions of research design into
two:
(a) Constructing an operational procedure to execute the
tasks required in completing your research work.
(b) Ensuring these procedures are sufficient to get valid,
objective and answers which are accurate to the questions
posed in the research work.
A research design should have the following :-
(i) Naming the study design (for example as comparative, Â
cross-section a or  random control)
(ii) How will the study population be identified?
(iii) What are the sampling methods used ( we will go further
about sampling in the coming topics)?

19. Types: Exploratory studies
 An exploratory study is a valuable means of finding out
‘what is happening; to seek new insights; to ask questions
and to assess phenomena in a new light’ (Robson 2002:59). It
is particularly useful if you wish to clarify your understanding
of a problem, such as if you are unsure of the precise nature
of the problem
 There are three principal ways of conducting exploratory
research:
1. a search of the literature;
2. interviewing ‘experts’ in the subject;
3. conducting focus group interviews
Descriptive studies
 The object of descriptive research is ‘to portray an accurate
profile of persons, events or situations’
Explanatory studies
 Studies that establish causal relationships between variables
may be termed explanatory research. The emphasis here is

20. The different research strategies
 The strategies that we consider in research are:-
Experiment; It’s a form of research that owes much to the natural
sciences, although it features strongly in much social science
research, particularly psychology
Survey;-Usually associated with the deductive approach. It is a
popular and common strategy in business and management
research and is most frequently used to answer who, what, where,
how much and how many questions
Case study;-strategy for doing research which involves an
empirical investigation of a particular contemporary phenomenon
within its real life context
Action research; its concerned with the resolution of organizational
issues such as the implications of change together with those who
experience the issues directly
Grounded theory; helpful for research to predict and explain
behaviour, the emphasis being upon developing and building theory
Ethnography; purpose is to describe and explain the social world

21. Quantitative research
 Quantitative research refers to the
systematic empirical investigation of
social phenomena via statistical,
mathematical or computational techniques
 The objective of quantitative research is to
develop and employ mathematical models,
theories and/or hypotheses pertaining to
phenomena.
 Its any data that is in a numerical form such
as statistics, percentages, etc. Quantitative
research generates numerical data or data
that can be converted into numbers for a

22. cont
 Quantitative research designs are either
descriptive (subjects usually measured
once) or experimental (subjects
measured before and after a treatment).
 A descriptive study establishes only
associations between variables. An
experiment establishes causality.
 The process of measurement is central
to quantitative research because it
provides the fundamental connection
between empirical observation and
mathematical expression

23. cont
 Quantitative data is most often collected in the
form of a questionnaire or survey
 The research process typically involves the
development of questions as well as scales that
are used to measure e.g. feelings, satisfaction
and other important factors on a numerical
level.
How would you rate the general banking services
in Kenyan?
5 4 3 2 1
Satisfactory Below
Standard
 In quantitative research, the aim is to determine
the relationship between one thing (an

24. cont
39. How would rate the government in some of the policies stated below;
High 5 4 3 2 1 Low
a. Ensuring the borrowing rates is affordable to borrowers
b. Increasing of the budgetary budget for the rural set-up
c. Pardoning farmers loan defaulters
d. Improve of rural technology
e. Improve of road networks in your rural set up
f. Providing security in the rural areas
g. Promoting trade linkages in the rural set-up
h. Ensure land tenure and property rights are clear
i. Court system lack transparency and efficiency
j. Initiation of Agricultural insurance
k. Community mobilization through self help groups

25. cont
A typical other example would be a
current workshop survey card that
asks “from 1 to 5, with one being ‘very
dissatisfied’ and 5 being ‘very
satisfied,’ how would you describe
our training today in meeting your
expectation ?”
5 4 3 2 1
Very satisfied
Very Dissatisfied

26. Cont
Types of quantitative data collection
methods:
1. Experiments •
True experiments are
characterized by random assignment of
subjects.
2. Quasi-Experiments •
Involve on non-
randomized assignment of subjects to
experimental conditions.
3. Surveys- •
Surveys include cross-
sectional (observations at one specific
point in time) and longitudinal studies
(study of repeated observations on similar
variables)
Ideally, quantitative research looks to obtain

27. Cont
 Qualitative is used predominantly as a
synonym for any data collection technique
(such as an interview) or data analysis
procedure (such as categorizing data) that
generates or use non-numerical data.
Qualitative therefore can refer to data other
than words, such as pictures and video clips.
 In choosing your research methods you will
therefore either use a single data collection
technique and corresponding analysis
procedures (mono method) or use more than
one data collection technique and analysis

28. Modeling
Relationship of variables
1. Linear relationship
2. Multiple regression relationship- attempts to
model the relationship between two or more
explanatory variables
3. Logistic regression relationship-s a type of
regression analysis used for predicting the
outcome of a categorical dependent variable
4. Pearson correlation moment- a measure of the
strength of a linear association between two
variables
5. Time series –long run relationship
6. Co-intergration - If two or more series are
individually integrated e.t.c

29. Time horizons
Cross-sectional studies- the study of a particular
phenomenon (or phenomena) at a particular time. Cross-
sectional studies often employ the survey strategy
 They may be seeking to describe the incidence of a
phenomenon (for example, the IT skills possessed by
managers in one organization at a given point in time) or
to explain how factors are related in different
organizations
 However, they may also use qualitative methods. Many
case studies are based on interviews conducted over a
short period of time.
 Longitudinal studies- The main strength of longitudinal
research is the capacity that it has to study change and
development. In longitudinal studies the basic question is
‘Has there been any change over a period of time

30. cont
You may need to ask the following questions in
deciding on a research topic:
 What is the contribution to knowledge in your
field of study?
 Has it been done by others before?
 What is the theoretical framework for the
study?
 What are the research hypotheses or
questions?
 Are data, if needed, available?
 How to collect data?
 What are the appropriate methods in
analyzing the data?
 What are the expected end results?
 Can the thesis be done within the time period

31. APPRAISE LITERATURE JOURNAL
ARTICLES
What questions will the literature review
answer?
 What do we already know in the area/s under
investigation?
 What are the key concepts, factors or variables?
 What are the existing theories?
 What are the inconsistencies, limitations or
problems in the existing research?
 How does the existing knowledge relate to your
study?
 Why study this problem?
 What contribution could the present study

32. How is the literature review judged?
It is usually judged in three main areas:
1. The selection of the literature
 Have you clearly indicated the scope and
purpose of the review?
 Have you included a balanced coverage of what
is available?
 Have you included the most recent and relevant
studies?
 Have you included enough material to show the
development and limitations in this area?
 Have you indicated the source of the literature
by referencing accurately?

33. 2. Critiquing of the literature review
 Have you clearly (and logically) ordered
and sorted the research, focusing on
themes or ideas rather than the authors
 Does the review move from broader
concepts to a more specific focus?
 Is there adequate critique of research
limitations, including design and
methodology?
 Are the studies compared and contrasted
with controversies highlighted?
 Is the relevance to your problem clear?

34. Summary and interpretation of the literature
Have you made an overall
interpretation of what is available?
Do the implications provide
theoretical of empirical justification
for your own research
questions/hypothesis?
Do the implications provide a
rationale for your research design?

35. What reporting verbs should I use?
 Avoid over-using "states" and "says". You may need to use
tentative or evaluative verbs.
1) Tentative verbs are often used to show that findings are
incomplete or difficult to generalize from.
e.g. Research suggests that a majority of people prefer
email to…
(Mahlab 1995).
Wang (2003) indicates that such results are not
necessarily…
2 ) Evaluative verbs can pack in extra meaning by
incorporating your evaluation of the text.
e.g. Jacob concedes that the test is not 100 per cent
reliable.
This is much stronger than "Jacob states that… " since
concedes
includes the judgment that Jacob was reluctant to make the
acknowledgement.
Some other strong reporting words are:
 describe, contend, examine, assert, dispute, claim,

36. Critical Appraisal Guide for Quantitative Studies
 Appraising a journal article is carefully and systematically
examining the article to judge its trustworthiness, its
value and relevance in a particular context
 Critical appraisal is the process of systematically examining
research evidence to assess its validity, results, and relevance
before using it to inform a decision” (Hill and Spittlehouse,
2001, p.1).
 The Critical Appraisal aims to help people develop the
necessary skills to make sense of scientific evidence based
on validity, results and relevance
 Research involves gathering of data , collection of data
and analysis of the data to produce meaningful
information. However, many of the research are not in
good quality and many studies are biased and
their results are untrue. This can lead us to draw false
conclusions

37. cont
 Critical appraisal is an essential step in the process of putting
research into practice.
 Asking questions about an article’s research methodology
 Scrutinizing its data collection and analysis methods
 And evaluating how its findings are presented will help you to
determine whether that article’s conclusions should influence
practical decision-making
 Different research questions require different study designs.
For example the best design for studies evaluating the
effectiveness of an intervention or treatment is a randomized
controlled trial.
 Studies are also subject to Bias, Confounders and it is
important that researchers take steps to minimize this bias
&confounders. For example, use of a Control group,
Randomization and blinding.

38. What to look at
1. Why was the study done?
• Was there a clear explanation of the purpose of the study and, if
so, what was it?
2. What is the sample size?
• Were there enough people in the study to establish that the
findings did not occur
by chance?
3. Are the instruments of the major variables valid and reliable?
• How were variables defined? Were the instruments designed to
measure a
concept valid (did they measure what the researchers said they
measured)? Were
they reliable (did they measure a concept the same way every
time they were
used)?
4. How were the data analyzed?
• What statistics were used to determine if the purpose of the
study was achieved?
5. Were there any untoward events during the study?
• Did people leave the study and, if so, was there something

39. Appraisal of a journal article
Abstract
What to look at
 Purpose including problem statement
 Design/approach
 Objectives
 Research limitations/ population/extent of research/implication
 Findings
 Practical implication
 Originality/value
 Key words
Background of the study
 Funnel approach- global perspective, regional and local
 Variables description capturing background of key variables-
independent and dependent variables
Statement of the problem
 Is there a problem, who is say so? What are the gaps i) contextual
gaps ii) conceptual gaps iii) empirical gaps iv) methodological gaps.
What did the study seek to achieve?

40. cont
Research gap is actually what makes your research
publishable, why? Because it shows you are not just duplicating
existing research; it shows you have a deep understanding of
the status of the body of knowledge in your chosen field; and
finally it shows that you have conducted a research which fulfills
that gap in the literature.
 Contextual Gap- Something contextual relies on its context
or setting to make sense. ... You can use the adjective
contextual to describe what some thing means as it
relates to a place, or meaning in a written text.
 Conceptual gap-A conceptual gap arises because of some
difference between the user's mental model of the
application and how the application actually works. If the gap
is large enough, it can stop the user’s work. For example, a
user who wants to search the web for free local concerts may
not know how to formulate a query that will yield this
information.

41. Objectives and research questions
 Ensure the objectives have independent
and dependent variable and verbs used
make it measurable
Theoretical gap -one is pointing at an
area for which theory fall short, which
means also that no publish theory has
addressed the concerned area
Empirical gap- what is the study about,
where and when was it done and by who,
what was the methodology, what was the
findings and recommendations, what do

42. 1. Read the abstract
 Are your issues discussed there?
 What are the main findings of the research?
 Do you want to know more after reading the abstract?
 Does it address a related question?
 Are there reasons to doubt the findings without reading the whole article?
2. Read the Introduction and Background of the study
 The introduction and Background sections will help you to identify the
key concepts, goals, subjects, and themes of the research.
3. Methodology section
 The Methodology will give you a step-by-step description of exactly how
the study was carried out.
 Where the study was done?
 From whom the data was collected ?
 Is it primary or secondary data
 And how the data was collected

43.  How good is the data?
 Does the study adequately control for differences between the
groups being compared?
 Are the statistical methods appropriate?
 Is the sample large enough to produce significant results?
How good are the measures?
 Do the measures accurately reflect what the researcher was
trying to measure (validity)?
 How clear and appropriate are these measures? (Too broad?
Too narrow? Ambiguous?)
 Are they actual measures or proxy measures?
 Are the measures well established in either prior research or
through pilot testing by the researcher, or are they ad hoc?

44. What are the author’s findings and conclusions?
Compare the abstract to the Discussion
The discussion section is more detailed and precise than the
abstract, and will explain the limitations of the research and
possible implications which are not mentioned in the abstract.
Compare the raw data given in the tables with the results
analyzed in the discussion and conclusions
 Are the results reported in the conclusions consistent with what is
reported in the tables?
 Is the interpretation consistent with what the actual findings
were?
How well are the results related to other research on the
same topic?
 In the discussion or conclusions section, is there a review of how
these results compare or contrast with prior research?
 If this report found something different from previous research,
then it’s important to question on appraising the reliability of the
findings.

45. Critical Appraisal of an article on Harm / Risk
1. Are the results of the study valid?
Primary Guides
• Was the exposure status clearly defined and measured?
• How was the outcome of interest measured?
•What was the follow up time and was it adequate to
measure the outcome of interest?
•Was the outcome measured in the same way for both
exposed & not exposed?
Secondary Guides
•How much was the attrition? (Loss to follow up)
•Are there confounders that the investigator did not
address?

46. 2. What were the results?
• How strong is the association between exposure
and outcome? ( Look for Relative Risk, Hazard
ratio)
• How precise is the estimates of the risk ? (Look
for 95% CI and p value for statistical test of
significance)
3. Will the results help me?
• Are the results applicable to my population?
• What is the magnitude of the risk ?
• Should I attempt to stop the exposure?

47. Methodological perspectives in accounting and
finance
Probit model-
 Probit analysis is a type of regression used to analyze
binomial response variables. Got as a result of a
series of Bernoulli trials or a series of one of two
possible disjoint outcomes traditionally denoted success
1 and failure 0. ie any single trial produce two possible
outcme, either success or failure.
 It transforms the sigmoid dose-response curve to a
straight line that can then be analyzed by regression
either through least squares or maximum likelihood.
 Probit analysis can be conducted by one of three
techniques:
1) Using tables to estimate the probits and fitting the
relationship by eye,
2) Hand calculating the probits, regression coefficient,
and confidence intervals, or

48. formula

49. Logit model
 logistic regression is used in finance research where the
dependent variable is dichotomous in nature i.e 1 or 0 and
the explanatory variables quantitative or qualitative. Areas of
research include :
Prediction of bankruptcy ( bankrupt firms 1, non-bankrupt=0)
Bankruptcy models assign firms to one of two groups: a
‘good firm’ group that is likely to pay any financial obligation;
or a ‘bad firm’ group that has a high likelihood of defaulting
on any financial obligation. Therefore, default prediction
problems lie within the scope of the more general and widely
discussed classification problems.
 Logistic regression is also known as logit regression, and
logit estimation.
 Empirically, the model is only applicable to a binary response
output variable, and is calculated using the equation of the
form ,

50. cont
 Where p is the probability of the outcome of interest, it can be
0 or 1, b0 is the intercept term, and bi (i=1, ... , n) represents
the b coefficient associated with the corresponding
explanatory variable x1(i=1, ..., n) .
Interpretations of results
Panel data analysis
Its a statistical method, widely used in social science,
epidemiology, and econometrics to analyze two-dimensional
(typically cross sectional and longitudinal) panel data. The
data are usually collected over time and over the same
individuals and then a regression is run over these two
dimensions.
Panel Data Examples
The individuals/units can for example be workers, firms, states
or
countries

51. Why Analyze Panel Data?
We are interested in describing change over time
 social change, e.g. changing attitudes, behaviors, social
relationships
 individual growth or development, e.g. life-course
studies, child development, career trajectories, school
achievement
 occurrence (or non-occurrence) of events
 One way to organize the panel data is to create a single
record for each combination of unit and time period:
StudentID Semester Female HSGPA GPA
JobHrs
17 5 0 2.8 3.0 0
17 6 0 2.8 2.1 20

52. Example of panel with 2 explanatory
variables:
Y it = b1 + b2X2it + b3X3it + uit
Notice the subscript index it
i stands for the i : th cross-sectional unit, i = 1, ...,N
t stands for the t : th time period, i = 1, ...,T
Different intercepts for different individuals b1i
Yit = b1i + b2X2it + b3X3it + uit
but each individuals intercept does not vary over time
If the number of individuals is N = 4
Yit = a1 + a2D2i + a3D3i + a4D4i + b2X2it + b3X3it + uit