Debabrata Datta

Determinants of Capital Structure of Indian Corporate Sector in the Period of Bull Run 2003-2007 - An Econometric Study

There are three major theories in the Corporate Finance literature, namely, Trade-off theory, Agency Cost theory and Pecking-Order theory that highlight different determinants of corporate capital structure. In an attempt to study the determinants of capital structure in Indian scenario and to verify whether any of the above mentioned theories can characterize the Indian corporate financing, this paper makes an empirical study of the capital financing pattern of 76 Indian firms for the period 2003-2007, the period of unprecedented growth of Indian economy. The study makes fixed effect panel data (LSDV) regression and finds out that financing with internal funds, as suggested by pecking-order theory has emerged as a major feature of corporate capital structure. Some other determinants, however, have patterns of influences that match with the postulates of other two theories. The analysis finds out that the capital structure pattern on an average portends well for long term development of Indian corporate sector.

Spectrum Auction and Investment in Telecom Industry - A Suggested Policy

The telecommunication firms operate on the basis of acquisition of airwave space, which is licensed by the government. The usual policy practice in this regard is ascending auction that ensures maximization of revenue for the government. The established view in the literature is that the resulting high license fee is a sunk cost and therefore cannot adversely affect the industry. But this paper shows that high license fee can influence the lending banks interest charge for which the infra structural investment in the telecom industry suffers and results in lower quantum of services with degraded qualities. The analysis is based on capacity and quantity choice game. The paper looks into the social planners objective of growth and revenue maximization and observes that these objectives are better realized if a part of the license fee is spent for the subsidization of telecom investment.

Telecommunications Industry in the Era of Globalization with Special Reference to India

Globalization opens up possibilities for gains in efficiency through international exchange based on the principle of comparative advantage. These gains are very significantly augmented with the development of communications system that reduces cost of negotiations, monitoring, and coordination. The advent of telegraph as a communication device in 1839 in Britain marked a signal change in this scenario of cost of communication.

Small Business Finance - Implication of Delay in Loan SanctionsBy Formal Sector

The small business finance is characterized by the existence of formal and informal credit market. This paper looks at the operation of formal and informal credit market in terms of a model. It first considers the hierarchical structure of the formal lending sector and shows emergence of delay in loan disposal as a pooling equilibrium among all types of officials. The paper then presents the loan negotiation process in the formal sector as one of bargaining and uses the results of Rubinsteins bargaining game. It is shown that in the context of this game, the possibility of delay in the settlement of the loan negotiation can induce some of the borrowers to leave the formal credit market and go to the informal market. This explains the coexistence of both types of credit market. The paper therefore has the policy conclusion that the formal sector should look at the behavioural aspects of the loan officials and design policies that cam prompt the officials to reduce the time span of loan settlement process for small business finance. Moreover, given the different nature of the formal and informal market, the policy on formal sector should focus on supplementing rather than supplanting the informal market.

Political connection and firm value: an Indian perspective

Purpose – The purpose of this paper is to verify existence of political connection of firms in India. For this purpose the paper first presents a theoretical model and then tests empirically the movement of stock prices during two state elections in India. Design/methodology/approach – The methodology is theoretical modelling where the paper applies the standard Cournot model of oligopoly. The paper then applies correlation and Wilcoxon Paired Rank Sum test to verify the results of the theoretical model by using data from the Indian stock market during the election results. Findings – The theoretical result states that some firms opt for political connection and some remain independent in an oligopoly. It also shows that political connection affects stock price. The empirical results find out that divergent responses of stock prices to the election results can be linked to politically connection. Research limitations/implications – The theoretical model is a simple two firm model and not generalized to n ...

A Simple Model of Macroeconomic Instability in the Background of the Indian Economy

The article first looks at the working of an open economy under a situation of price flexibility in a static framework. This extends the Mundell–Fleming model and shows the effect of exchange rate movement in a richer perspective. The article then introduces the role of depreciation of domestic currency in increasing cost of production by increase in the cost of imported inputs and shows the possibility of multiple equilibria. This could lead to the emergence of an economic crisis in a country that is dependent on critical imported input and also suffering from current account deficit. If the outstanding loan amount of this economy is also large, the chances of a crisis are extremely high and policymakers should introduce measures with all earnestness to set right the situation. The article then considers a dynamic version of the macroeconomic model and shows a variety of equilibria. Although the usual case is one of global stability, there may be saddle point stability as well in several cases where (a) depreciation of currency increases price substantially and (b) confidence of the economy is low. But the most critical case could be one under current account deficit when foreign exchange reserves start declining. Here there is saddle point instability and if the confidence level of the economy is low, the economy could be prone to crisis. The article concludes that the Indian economy, in its current state, is exhibiting similar characteristics. JEL Classification: F41, E32

Better Portfolio Diversification – A Neglected Aspect of Stock Splits: Findings from Indian Stock Market

Several theories like optimal trading range hypothesis, liquidity hypothesis, signaling hypothesis have been advanced in relation to this non-economic corporate event. But still there is need to study the investors’ optimizing behavior after stock split. With this focus on optimization of the investors, we introduce the aspect of diversification, as a factor leading to price and volume response of the split stock.Economic theory states that when price is lower, there is a tendency for diversification by the investors. In this case there may be increase in demand but there may also be a change in supply on account of change in the attractiveness of offload. This paper studies the change in volume of trade for split stocks in Indian market before and after split to capture this effect. The result shows that the effects on stocks of large priced stock and small priced stock are different, giving credence to diversification theory.

Giffen Input in Cournot Model

Text book analysis shows that there is no giffen input in contrast to existence of giffen good in consumers case. This paper shows that while this result holds for perfect competiton and monopoly, in the context of Cournot model there can be giffen input.

Corporate Investment Behaviour in India During 1998–2012 Bear, Bull and Liquidity Phase

The study of the determinants of the capital structure of Indian firms assumes significance since it deals with the pattern of financing of corporate investments. Over the last 15 years, the Indian economy experienced three different phases of economic growth, viz. 1998–2002, 2003–2007 and 2008–2012. Our study shows that firms relied more on debt financing during the bear phase of 1998–2002 but shifted towards increased equity financing in the bullish period of 2003–2007. The leverage of firms in a year declined in response to increased profit of the earlier year and this behaviour implied debt aversion. The increased financing of investments by corporate savings during 2003–2007 boosted up India’s growth rate. The post-meltdown period of 2008–2012, however, witnessed fall in corporate savings and investments and the accumulation of excess speculative liquidity.

Announcement Effect of Dividend in Presence of Dividend Tax: Possible Agency Problem and Macro Level Inefficiency?:

This article evaluates the efficiency of existing dividend distribution tax in India from the perspective of investors’ preference pattern, as revealed in the market. It investigates the announcement effect of dividend in India in the presence of dividend distribution tax with specific legislative intent of discouraging dividend distribution. Using data on large profitable firms, we show that despite firm-level tax, higher dividend payout announcement leads to significant rise in share price. This implies that despite being tax-disadvantaged, investors of large profitable firms prefer higher payout, because it mitigates agency cost of retention. This shows that dividend distribution tax is inefficient. JEL Classification: G32, G35