Dividend Changes and Profitability:
An Empirical Study of Indian Manufacturing Firms
-- Jijo Lukose P J and S Narayan Rao
The study, using a large sample of firms listed on the Bombay Stock Exchange (BSE), examines the stock price reaction to dividend
changes and the relevance of signaling models in explaining the valuation effects associated with dividend changes. The study finds significant
wealth effects around dividend changes as proposed by the signaling models. There is a strong positive relationship between dividend changes
and profitability during the year of dividend change. Dividend initiating (omitting) firms have large increase (decrease) in earnings in the
year of change, compared to the moderate change in earnings in case of dividend increasing (decreasing) firms. Dividend changes contain
no information about future earnings in the subsequent years.
© 2010 IUP. All Rights Reserved.
Back to Basics:
Cost of Capital Depends on Free Cash Flow
-- Ignacio Vélez-Pareja
Most popular corporate finance literature and practitioners present the Weighted Average Cost of Capital (WACC) calculation as
independent from the Free Cash Flow (FCF). It is a common practice that practitioners calculate a WACC a priori and use it independently from the firm value (i.e., from FCF). This study shows that FCF affects WACC and that this interrelationship creates circularity, and also
how the same can be solved in a very easy way. The two Appendixes of the paper explain the circularity issue and deriving a proper
formulation of the cost of equity.
© 2010 IUP. All Rights Reserved.
Macroeconomic Variables, Financial
Sector Development and Capital Structure
of Indian Private Corporate Sector
During the Period 1981-2007
-- Kiranjit Sett and Jaydeb Sarkhel
Assuming that firms operate in a perfect and frictionless capital market, Modigliani and Miller (1958) argue that the value of a firm
is independent of its capital structure. But other researchers argue that financial leverage depends on firm, industry and
country-specific factors. As an economy transforms itself from an agro-based one to an industry and services-based one, the orientation of its
financial system may also change. The orientation of the financial system and macroeconomic variables are expected to affect the sources of
finance and the costs and benefits associated with different forms of financing. This paper examines the effect of the financial system
and macroeconomic variables on the financial leverage of the Indian non-financial private corporate sector during the period 1981-2007. It
is found that financial leverage is negatively related to stock market development and positively related to banking sector development,
rate of inflation and effective rate of corporate tax.
© 2010 IUP. All Rights Reserved.
Japanese Interest Rate Swap Spreads
Under Different Monetary Policy Regimes
-- Takayasu Ito
This paper investigates the determinants of Japanese interest rate swap spreads by considering the different monetary policy regimes of
the Bank of Japan (BOJ). Four determinants of swap spreads—corporate bond spread, TED spread, slope of yield curve, and
volatility—were chosen. When the monetary policy was easing, swap spreads decreased as credit risk increased. When the monetary policy was
tightening, 10-year swap spread decreased in accordance with the increase of corporate bond spread. TED spread contributed to swap
spreads positively in all maturities under tightening cycle of the monetary policy. Slope of yield curve contributed more actively to the swap
spreads in all maturities in quantitative easing period and to the swap spreads of 5 years, 7 years and 10 years in tightening aspect.
Volatility contributed more actively to the swap spreads in all maturities in easing phase.
© 2010 IUP. All Rights Reserved.
The Impact of Financial Restructuring
on the Performance of Pakistani Banks:
A DEA Approach
-- Mian Sajid Nazir and Atia Alam
Privatization is considered one of the most sophisticated techniques to improve the financial position of the banking sector and has
been empirically tested by many researchers through different methods; and still, many studies are under way to assess its implications on
the economy. Prior research has shown a significant positive effect of privatization on the financial institutions' profitability. The present
study is conducted to evaluate the operating efficiency of 28 Pakistani commercial banks over a five-year period, i.e., 2003-2007, through
the traditional method and Data Envelopment Analysis (DEA) approach. The results of the traditional approach suggest that
privatization cannot help banks in improving their operating income. These results add further robustness to the findings of the DEA approach
of measuring efficiency, which show that public banks are better able to cover their interest and
non-interest expenses from their corresponding revenues.
© 2010 IUP. All Rights Reserved.
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