Capital Expenditure Decisions and the Market Value of the Firm

-- Amitabh Gupta and Charu Banga

Capital expenditure decisions have a long-term effect on the value of the firm. Extant literature posits that stock prices of companies increase very quickly to incorporate such information. However, limited research has been undertaken in this area in India and thus the motivation for the present study. This paper examines stock market reaction to the announcement of 493 capital expenditure decisions made by companies during the period January 1, 2004 to December 31, 2006. An event study methodology is used to examine the share price behavior around such announcements. Results indicate that the market reacts significantly on the day of announcement, thus reflecting that it views such decisions as value enhancing. The study also looks at the size effect of capital expenditure decisions. Results show that the reaction of the Indian stock market is statistically, positively significant for large investments, and positive but insignificant for small investments. The results of the study are in sharp contrast to the international evidence.

© 2009 IUP. All Rights Reserved.

Capital Flows Under Different Modes of Financial Liberalization: Evidence from India and Turkey

-- Ekin Tokat

This paper studies the possible link between different modes of financial liberalization and economic performance. Two emerging economies, Turkey from the Middle East and North Africa (MENA) region and India from the South Asia region, are selected for the analysis as they follow two different approaches for conception and implementation of reforms (shock therapy and gradualism respectively). The study specifically analyzes the nature of capital flows under different liberalization paths. Vector Autoregression (VAR) technique is used to examine the link between international capital flows and the economic growth. The results indicate a strong relation between the economic growth and the non-resident cash flows in the shock therapy case, Turkey. There is also evidence suggesting that India, following a gradualist approach, is less prone to crises with more stable financial variables than Turkey.

© 2009 IUP. All Rights Reserved.

Ownership Structure and Firm Performance: An Empirical Study on Listed Mid-Cap Indian Companies

-- Santanu K Ganguli and Shail Agrawal

This paper examines the relationship between the performance and ownership structure of a sample of 98 mid-cap companies listed on the National Stock Exchange (NSE) of India, as mid-cap sector is considered a high growth sector of the economy. In India, the shareholders are broadly divided into two categories—promoter shareholders and non-promoter shareholders. The study results suggest that promoters' shareholding (measure of concentration) is statistically significant in explaining performance. When concentration is treated as endogenous, the same is found to be dependent on performance. The study highlights that the ownership of high growth mid-cap companies of India continues to remain concentrated, even in the post-1992 economic liberalization, impacting the performance amid the general perception that substantial diffuseness has occurred.

© 2009 IUP. All Rights Reserved.

Market Reaction to Buyback Announcements in India

-- R L Hyderabad

This paper examines the excess returns on the announcement of share buybacks by Corporate India. The study finds significant announcement day Average Abnormal Return (AAR) of 2.77% and Cumulative Abnormal Return (CAR) of 7.91% for a sample of 70 announcements for the period 1999-2007. The overall CAR is 7.24% for a 41-day window. The fall in CAR in the post-offer period suggests that all positive returns are realized in the pre-offer period only. This result contradicts the prediction of signaling hypothesis. The fixed price tender offers yield higher announcement returns than open market repurchases in the Indian context.

© 2009 IUP. All Rights Reserved.