Jitendra Mahakud

Historical Market-to-Book Ratio and Corporate Capital Structure: Evidence from India

This paper tries to identify the nature of historical market-to-book ratio, that is, whether it can be used as a market timing proxy or growth opportunity proxy and to find out its impact on capital structure and the adjustment speed to target capital structure. Using a panel data analysis we find the evidence that the historical market-to-book ratio has been a better proxy for growth opportunity than market timing and it plays a significant role for determination of capital structure for Indian manufacturing companies. We also find that Indian manufacturing companies do have a target capital structure and the speed of adjustment to this target capital structure has been around 40 per cent, but the historical market-to-book ratio does not have a significant impact on the speed of adjustment.

Investor sentiment, risk factors and stock return: evidence from Indian non‐financial companies

Purpose – The purpose of this paper is to evaluate the pricing implication of aggregate market wide investor sentiment risk for cross sectional return variation in the presence of other market wide risk factors.Design/methodology/approach – The paper employs the Fama and French time series regression approach to examine the impact of market risk premium, size, book‐to‐market equity, momentum and liquidity as risk factors on stock return. Given the importance of inherent imperfect rationality or sentiment risk, the paper further investigates the impact of investor sentiment on the cross section of stock return.Findings – The choice of a five factor model is apparently persuasive for consideration in investment decisions. Stocks are hard to value and difficult to arbitrage with characteristics which are significantly influenced with the sentiment risk. It is naive to argue for the universal pricing implication of sentiment risk in a multifactor model framework.Research limitations/implications – The test as...

Emerging trends in financial markets integration: the Indian experience

Purpose – Financial sector reform measures, which were initiated in 1991, have provided some degree of maturity and integration of different segments of Indias financial markets. The purpose of this paper is to articulate the impact of financial sector reform measures on integration of various segments of financial markets in India.Design/methodology/approach – The paper surveys various methodologies for measurement of financial integration and uses the recently developed technique of co‐integration in a VAR framework to assess the extent of integration of various segments of Indias financial markets.Findings – The paper concludes that the financial market integration is inconclusive in India. Only a few segments of money market, Gilt market and foreign exchange market are integrated. Interest rate parity does not hold in Indias case, which indicates poor evidence in support of international integration of domestic financial markets. Similarly, the analysis of the relationship between domestic saving a...

Conditional multifactor asset pricing model and market anomalies

Purpose – The purpose of this paper is to investigate the firm-specific anomaly effect and to identify market anomalies that account for the cross-sectional regularity in the Indian stock market. The paper also examines the cross-sectional return predictability of market anomalies after making the firm-specific raw return risk adjusted with respect to the systematic risk factors in the unconditional and conditional multifactor specifications. Design/methodology/approach – The paper employs first step time series regression approach to drive the risk-adjusted return of individual firms. For examining the predictability of firm characteristics on the risk-adjusted return, the panel data estimation technique has been used. Findings – There is a weak anomaly effect in the Indian stock market. The choice of a five-factor model (FFM) in its unconditional and conditional specifications is able to capture the book-to-market equity, liquidity and medium-term momentum effect. The size, market leverage and short-run...

Determinants of Dividend Policy of Indian Companies A Panel Data Analysis

This article analyzes the trends and the determinants of the dividend policy of Indian companies that were continuously paying dividend during the whole period study that is from 1994–1995 to 2012–2013. We have used the static panel data models to carry out this analysis. From the trend analysis we find that larger, more profitable, more mature and highly liquid firms have higher dividend payout ratio, whereas the firms with high investment opportunity, financial leverage and business risk have lower dividend payout ratio. The findings from the panel data analysis suggest that investment opportunity, financial leverage, size of the company, business risk, firm life cycle, profitability, tax and liquidity are the major determinants of the dividend policy for Indian companies. These results were robust across the period also. The findings are consistent with the pecking order, transaction cost, signalling and firm life cycle theories of the dividend policy.

Investor Sentiment and Stock Return: Do Industries Matter?

The basic objective of this article is to evaluate the pricing implications of market-wide investor sentiment risk for cross-sectional return variations of Indian listed companies across industry groups. A multivariate time-series regression approach has been used to examine the impact of sentiment risk on stock return behaviour in the presence of other market-wide systematic risk factors. Our results suggest that the role of sentiment risk in the determination of a cross-section of stock returns is not uniform across the test asset portfolios formed on the basis of size, book-to-market equity, liquidity and momentum characteristics. For all portfolios, the impact of sentiment risk on the cross-section of stock returns behaviour has been disproportionately negative. The effect holds even after controlling for systematic market-wide risk factors. Although the impact of sentiment risk on industry-shorted portfolio returns persists in accordance with the theoretical argument, the cross-sectional variation with respect to different industries has been heavily dependent on the availability of stocks in that particular industry. The commonality of the sentiment effect across industry is not similar, as it is for the aggregate market. The results suggest that generalisation of the hard-to-value and difficult-to-arbitrage argument must be judged with caution, keeping the industry effects in mind. JEL Classification: GI,G12,G14

Determination of capital structure in India: a partial adjustment approach

We investigate the role of adjustment costs and other firm-specific variables like tangibility, growth opportunity, size of the company, profitability, volatility, nondebt tax shields and uniqueness of the company in the determination of capital structure in the case of 793 Indian manufacturing companies for the period 1995–1996 to 2006–2007. A dynamic partial adjustment model, more specifically the Generalised Method of Moments (GMM) technique, is used to test the dynamics of capital structure. The results indicate that firms do have a target capital structure. The adjustment speed towards the target capital structure is reasonably high and it varies with the definition of leverage ratio. All these results are consistent with the tradeoff theory of corporate capital structure.

Firm Characteristics and Total Factor Productivity: Evidence from Indian Manufacturing Firms

Measurement of the productivity of firms is an important research issue in productivity literature. Over the years, various methods have been developed to measure firm productivity across the globe. But there is no unanimity on the use of methods, and research on the identification of factors which determine productivity has been neglected. In view of these gaps, this study aims to measure total factor productivity (TFP) and tries to identify firm-specific factors which determine productivity of Indian manufacturing companies. The study is based on data of 616 firms from 1998–99 to 2012–13. To measure TFP, the Levinsohn–Petrin (L-P) method has been employed, and the fully modified ordinary least squares (FMOLS) method has been used to identify factors that affect TFP. The results reveal that embodied and disembodied technology plays a crucial role in the determination of productivity overall in manufacturing and other sub-industries. Similarly, the size of firms and intensity of raw material imports are also important for the determination of productivity across the sub-industries. JEL Classification: C14, C33, D24, L60

Investor Sentiment and Stock Market Volatility: Evidence from India

ABSTRACT In this article, the authors probe the role of irrational investor sentiment in the determination of Indian stock market volatility. The authors developed a new irrational aggregate sentiment index (IASI) to examine the issue. The conditional volatility is extracted from the nonlinear univariate models for the market indices and the IASI. The vector autoregression (VAR) is carried out to analyze the relationship between the volatility of irrational aggregate sentiment index and stock market volatility. The authors find a unidirectional causality from sentiment to stock market volatility, and their findings highlight the significance of sentiment in explaining the stock market volatility in India.

Market anomalies, asset pricing models, and stock returns: evidence from the Indian stock market

Purpose – This paper aims to investigate whether the use of conditional and unconditional Fama and French (1993) three-factor and Carhart (1997) four-factor asset pricing models (APMs) captures the role of asset pricing anomalies in the context of emerging stock market like India. Design/methodology/approach – The first step time series regression approach has been used to drive the risk-adjusted returns of individual securities. For examining the predictability of firm characteristics or asset pricing anomalies on the risk-adjusted returns of individual securities, the panel data estimation technique has been used. Findings – Fama and French (1993) three-factor and Carhart (1997) four-factor model in their unconditional specifications capture the impact of book-to-market price and liquidity effects completely. When alternative APMs in their conditional specifications are tested, the importance of medium- and long-term momentum effects has been captured to a greater extent. The size, market leverage and s...