This paper analyses the relative significance of financial objectives pursued by the corporate sector in
India. The following null hypotheses have been tested in this paper—Ho1:The companies do not stick
to a single financial objective. Ho2: The nature of industry to which a company belongs does not affect
the significance attached by it to different financial objectives. The data for the purpose of this study was
collected with the help of a questionnaire, which was mailed to the top 500 companies mentioned in the
report published by CMIE (1998). Of these, in all, 72 usable questionnaires were obtained, which have
been used for the purpose of analysis. Weighted Average Scores, ANOVA, t-test and Factor analysis were
used for the purpose of analysis and testing the hypotheses. The results reveal that the companies are
found to be postulating multiple financial objectives, while making decisions about capital projects.
Maximizing ‘Sales’, ‘Return on Investment’ and ‘Operating Profit before interest and taxes’ have emerged
as the most significant financial goals. Surprisingly, goals having market-related variables such as
maximization of ‘Market rate of return’, ‘Price-earning ratio’ and ‘Market value per share’ are the least
preferred. The Factor Analysis gave the following five factors:1. Maximization of Profits and Sales
2. Maximization of Shareholders’ wealth 3. Maximization of ROI 4. Maximization of Net Worth and Cash
Flows 5. Maximization of Total Assets. ANOVA results show that the companies belonging to different
industries have different set of objectives and hence, Ho2 has been rejected.
Objectives are only hopes unless they clearly define realistic results that state, what
is to be achieved by when. They should be specific, measurable, and achievable.
The objectives represent not only the end point of planning, but the end towards
which every move in the organization is aimed at. The profit maximization as a financial
objective dominated the financial economics and management literature for a long period
of time. However, this objective has been criticized on the ground that it is narrow in
scope and takes into consideration the short-term perspective of an organization.
Considering these limitations, the textbooks on finance emphasize that the major
objective of any finance function is to maximize the wealth of shareholders (for details
see Brigham 1985, p. 7; Chandra 2001, p. 6; Vanhorne 2002, p. 4; Khan and Jain 1994,
p. 15; Pandey 2000, p 14). It has been shown by the empirical research that in practice,
the companies often do not stick to a single financial objective rather they resort to
multiple financial objectives (Stonehill and others, 1975; Porwal, 1976; Porwal and others,
1979; Bhaskar and McNamee, 1983, Bansal, 1985; Pandey and Bhat, 1991; Patel, 1992; and
Jain and Kumar, 1998). The assumption of single objective has come under scrutiny
because its realization rests on unrealistic conditions of certainty and perfect capital
markets and better insights into corporate goal setting process. |
