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Perceived
Significance of Financial Objectives: An
Empirical Study
-- Subhash Chander and Anjana Bedi
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 paperHo1: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.
©
2004 The IUP Journal of APPLIED FINANCE.
Value
Creation in Indian Enterprises-An Empirical Analysis
-- M Venkateshwarlu and Nitesh Kumar
Managing
to create a sustained and sustainable Shareholders' Value
is currently recognized by the academicians and practitioners
as the most important objective of any enterprise. According
to the principles of Value Management, a firm must generate
adequate returns for its owners, in line with the relative
opportunity cost of the investment. Companies, whose returns
exceed the opportunity cost to their owners, create corporate
value and hence shareholders' value. This means that an analysis
of value and performance of a firm or one of its business
units centers around two main indicators: Value and Returns.
This study is an attempt to analyze the relationship between
non-market value performance indicators and market value,
with a view to understand the value creation process in the
Indian enterprises. The companies selected for the study are
firms listed either on Bombay Stock Exchange or National Stock
Exchange, and all these companies are profit-making and included
in the sector-specific indices of these exchanges. The firms
selected are widely held and the securities of these firms
are frequently traded. Analysis is done for a total of 172
companies, and were drawn from four sectors viz., 1. FMCG
Sector (36), 2. Healthcare (43), 3. Information Technology
(49) and 4. Public Sector Units (44). In our study, we found
that there exist relationships between certain non-market
value creation measures and market value. One feature of our
findings is that, the cash flow per share plays an important
role in the market return of any firm. However, there are
other parameters, which have strong correlation with market
return. Performance measures that contribute to the market
value vary from sector to sector and not common to all the
sectors under study.
©
2004 The IUP Journal of APPLIED FINANCE.
Delisting
of Otis Elevator Company India Ltd. and Carrier Aircon India
Ltd.A Study
-- Prabina Rajib
Delisting
of joint ventures and converting them to 100% subsidiaries
of MNCs Indian operations is increasing over the years and
close to 30 MNCs have delisted their Indian operations from
Indian stock market. Delisting of these companies has drawn
considerable attention from policy makers, institutional and
investors. Like any debatable issue with two sets of contrasting
viewpoints put forward, this paper discusses the reasons for
MNCs supporting their action, while Indian investors, especially
minority investors are criticizing such a move. In light of
some of the criticisms leveled against MNCs, this paper discusses
various dimensions of delisting/buying out of promoters stake/various
rounds of open offers of two companiesOtis India Company Ltd.,
and Carrier Aircon Ltd., both belonging to one MNC parent.
This paper analyzes whether both companies gave bleak picture
of their fundamentals which could have a bearing on stock
price movement in the bourse so that enabling the MNC parent
to come out with an "open-offer price-at-a-huge-premium-to-prevailing-market-price"
as alleged by Indian shareholders. Comparison of various rounds
of open offers for both companies has also been done to find
out whether the parent MNC followed a similar strategy as
far as timing, pricing of open offers, and the modalities
of delisting are concerned. This paper also discusses issues
like whether delisting of Indian operation was part of long-term
strategy of the parent or not, and whether the parent MNC
has been able to achieve objectives of delisting the Indian
operations.
©
2004 The IUP Journal of APPLIED FINANCE.
Stock
Market Reaction to
Announcement of Policy Changes
-- Munmun Mohanty
This
study examines the response of stock prices quoted on the
Bombay Stock Exchange (BSE) to policy pronouncements which
affect the profitability of a particular industry or a group
of firms. We have covered three industries namely; the telecom
sector, the banking and financing sector and the pharmaceutical
sector. We have studied the reaction of these industries to
announcement of policy changes by the Government of India.
We have used the event study methodology to assess the speed
and accuracy of stock price reaction to public announcement.
The results show that the stocks generally react to public
news quite quickly, but the first adjustment is not always
the correct one. There is also a mild evidence of presence
of learning lag. However, these aberrations are not significant
enough to be exploited to reach at a profitable trading strategy.
©
2004 The IUP Journal of APPLIED FINANCE.
Causal
Relationship between Foreign Institutional Investment and
Indian Stock Market
-- Subarna Dey and Bishnupriya Mishra
With
the liberalization of Indian economy since 1992, the Foreign
Institutional Investments have started coming in and have
steadily gained importance subsequent to a series of structural
reforms and stabilization programs. The present study tries
to examine the determinants of Foreign Institutional Investments
in India which has reached almost US$1bn during October 1-17,
2003 itself. Given the huge volume of these flows, the understanding
of the behavior and pattern of these investments is vital
for finding out their impact on domestic financial market.
The nature and volatility of foreign capital inflows is hard
to model and predict precisely. A number of possible explanatory
variables can be included for further research purpose. The
implication of this study is to explore and debate on the
general belief that portfolio flows are primarily determined
by the stock returns. It is also debated that Indian Stock
Market plays to the tune of FII investments. Hence one of
the major objectives of this study is to examine the causal
relationship between the net FII inflows and the Indian stock
market represented by BSE Sensex. Using monthly data of FII
net investment and BSE market capitalization from 1998 to
September 2003, the authors explore the extent of correlation
between net FII inflows and stock market returns. While the
FII flows are expected to be highly correlated with equity
returns in India, they are more likely to be the effect rather
than the cause of these returns. The authors also discuss
the implications for policy makers with regard to attracting
more FII inflows that have a positive impact on the real economy.
Given the susceptibility of Indian markets to manipulations
and speculations, there is a high chance of equity market
bubbles aggravated by FII flows.
©
2004 The IUP Journal of APPLIED FINANCE.
Performance
Evaluation of Select Indian Mutual Fund Schemes: An Empirical
Study
-- O P Gupta and Amitabh Gupta
The
Indian mutual fund industry has witnessed a structural transformation
during the past few years. Therefore, it becomes important
to examine the performance of the industry in the changed
environment. This paper aims at evaluating the investment
performance of select Indian mutual fund schemes during the
recent four-year period from April 1, 1999 to March 31, 2003.
For this purpose, we have used weekly returns based on NAV
for 57 growth schemes. S&P CNX Nifty Index has been used
as a proxy for the market portfolio, while weekly yields on
91-day Treasury bills (T-bills) have been used as a surrogate
for risk-free rate of return. The investment performance has
been studied in terms of five measures viz., (a) Rate of Returns
Measure (b) Sharpe's Ratio, (c) Treynor's Ratio, (d) Jensen's
Differential Return Measure, and (e) Fama's Components of
Investment Performance. The empirical results reported here
indicate mixed performance of sample funds during the study
period. There is no conclusive evidence, which suggests that
performance of Indian mutual funds is superior to the market.
However, there is some evidence that some of the funds are
performing better than the market. Further, we found that
the sample funds are not adequately diversified. However,
the diversification level seems to have changed over time.
Thus, the results are similar to the ones reported earlier
for the Indian market.
©
2004 The IUP Journal of APPLIED FINANCE.
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