Santanu K. Ganguli

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 ...

Accounting Earning, Book Value and Cash Flow in Equity Valuation: An Empirical Study on CNX NIFTY Companies

Way back in 1934, Graham and Dodd observed the importance of earning power in investment theory. According to them, history of actual earning with a reasonable expectation should be approximated in future. The empirical study of Ball and Brown (1968) contends that of all the sources of information as regards the working of a firm during a year, income number reported in the annual income statement captures one-half or more. In the backdrop of relevance of accounting numbers for equity valuation, Feltham and Ohlson (1995) and Ohlson (1995) provide an objective valuation model based on abnormal earning. According to the models, the fundamental of valuation depends on abnormal earning—an autoregressive process of the first order [AR(1)] that is related to the abnormal earning of the previous period. Along with abnormal earning there may be other variables like book value of the equity, operating cash flow, accruals and other information (all of them being autoregressive, AR(1), processes) can be usedseverally and jointly for predicting equity value. In the present paper, an attempt has been made to test the forecasting ability of equity share value of CNX NIFTY companies of the National Stock Exchange of India empirically for a period of 10 years (1999-2008) by pooling cross-sectional data on abnormal earning, book value and operating cash flow in line with the forecasting and valuation equation models of Feltham and Ohlson (1995) and Ohlson (1995). The findings suggest that abnormal earning, book value and operating cash flow component of earning respectively follow an autoregressive process. Information on abnormal earning and book value aids in predicting equity value. The findings are consistent with Ohlson’s model.

Asset Quality of Indian Banks – A Catch 22 Situation

The paper empirically investigates the reasons behind poor asset quality of the Indian banks. The substandard asset quality is due to skewed nature of GDP distribution with service sector contributing around 53% of GDP. The efficiency of the said sector is attributable to deployment of strategic intangible assets requiring lesser bank finance. The banks have limited option to park huge house hold saving in quality assets. The scope of innovative advance is limited. There is no easy escape from this catch 22 situation unless there takes place structural change in the economy.

Negotiated Bank Finance, Earning Quality and Firm Characteristics: Indian Evidence

Based on ‘ agency theory’ the present study argues that in a negotiated and collateral security based debt financing system where the need for debt financing of the firms is largely met by the banks in absence of active and liquid corporate debt market , there should be a two way relationship between debt and earning quality. More specifically, we argue that banks, in the interest of better credit risk management, should extend finance to firms with reliable earning quality, and as the debt monitors the managerial behavior of the firms, earning quality of the firms should also get impacted by debt through closer scrutiny by lenders. To our knowledge no prior study has covered the relation between debt and earning quality from this angle so extensively in a bank dominated finance system of an emerging market. Lending policy is set by banks on the basis of overall Reserve Bank of India’s ( the central Bank) circulars and directives. In this framework earning quality may not appear to play any direct role in granting and enhancing credit limit, though the asset quality of banks is contingent upon ‘true and fair’ reflection of earning and cash flow generation of the borrowing firms. The empirical evidence seems to suggest that the firms might report ‘abnormal accrual’ to enjoy higher credit limit. Consistent with the result we find that tangible assets as ‘collateral security’ plays a more decisive role in mitigating credit risk rather than earning quality (being essentially a qualitative attribute).

Board Composition, Ownership Structure and Firm Performance: New Indian Evidence in a Unique Regulatory Environment

The paper explores the impact of board composition and ownership structure on firm performance of Indian firms from 2009-2013 in presence of certain unique statutory provisions relating to independent directors and limits on ownership concentration. The results show that after controlling for various firm and industry level parameters, both accounting performance and market performance of firms are positively impacted by ownership concentration and board size but not by board independence. We record a two-way relationship and ‘non-linearity’ between market performance and ownership concentration . Very low and very high concentration negatively impact firm performance, the former being attributable to ‘tunneling’ , and the latter to ‘illiquidity’ and ‘information asymmetry’ associated with sale of holding by insiders to bring down concentration to permissible statutory limits. Larger board size impacting performance positively indicates that plurality of views and representation of various insiders’ interest group might enhance performance but Independence has no such role because it may just be a ‘myth’.

PERSISTENT HIGH LIQUIDITY, OWNERSHIP STRUCTURE AND FIRM PERFORMANCE: INDIAN EVIDENCE

There exist conflicting arguments as regards the role of high liquidity on firm performance. Excess liquidity reduces financing cost in presence of information asymmetry but creates agency problem as the self-serving manager may not use the liquid fund in the stockholders’ best interest. The paper investigates the characteristics and performance of the persistent high liquidity firms in India in the backdrop of ownership structure for a five year period including one year prior to and one year succeeding the consistent high liquidity holding period. Empirical evidence reveals that the persistent high liquidity firms consistently post superior performance, have better growth prospect and resort to less debt financing. Ownership structure has no influence on the performance of such firms. However, consistent with trade off theory we find that persistent liquidity as a policy beyond a certain point in time may adversely impact performance. Also the firms may subsequently find difficulty in managing high growth expectation of the investors. Industry-and- size matched comparison firms with high ownership concentration tend to overinvest that might hinder performance. Nevertheless the firms meet the hindsight growth expectation of the investors.

Dividend, Minority Shareholders, Legal Protection, and Firm Value: Evidence from Singapore

Singapore -a common law origin first world country has a built-in system of reasonably adequate investors’ protection with high degree of security of property right. Consistent therewith the present paper empirically demonstrates that minority shareholders extract dividend from the firms as an outcome of legal protection in a manner that mitigates problem of expropriation by corporate insiders . Consequentially the firms follow a stable dividend policy catering to the needs of the investors with a favourable valuation implication. Overall our study highlights that the dividend policy of Singapore firms appear to ensure protection of minority shareholders right and that, in turn, is consistent with the global ranking and perception about the country in respect of security of property right.

Excessive Corporate Liquidity and Stock Return: Evidence from Indian Business Environment

Purpose: The paper examines the determinants, financial characteristics and the stock returns of the Indian firms holding excessive liquidity during post-meltdown period of 2008-12. Design/methodology/approach: The research design is essentially based on fixed effect model developed by Opler, Pinkowitz, Stulz and Williamson (1999) adjusted for variable specification necessitated by Indian condition and data availability. The model is used to identify the transitory’ and persistent excess liquidity firms. The financial characteristics, quarterly, bi-yearly and yearly stock returns of transitory, persistent excess liquidity firms and non-excess liquidity control firms are compared and analyzed. Findings & Conclusion: In India where banks play a major role in financing in view of illiquid debt market, speculative motive plays a dominant role in holding excess liquidity. Build up of excess liquidity arising from relatively strong economic performance of earlier years is utilised conservatively to decrease leverage rather than to gear up investment when investment opportunity is depressed due to weak macroeconomic outlook and structural factors. Greater liquidity holding does not translate into higher returns for varying periods till one year compared to a portfolio of non-excess cash control firms. But persistent high liquidity firms produce superior return than the return of transitory high liquidity firms. At variance with existing literature the results indicate that marginal value of liquidity does not decline with higher or longer liquidity holding when investment environment is unfavourable.

Why Do Firms in India Pay Dividend in Presence of Firm Level Dividend Distribution Tax ? - An Agency Theory Based Explanation.

Purpose: The purpose of the study is to analyze motivation behind payment of cash dividend by the firms in India in presence of tax provision that discourages payment of dividend by imposing tax on firms at the time of distribution. Design/methodology/approach First, consistent with Jensen’s (1986) view, the paper presents a theoretical model that shows - dividend payout addresses agency problem of free cash flow and then, empirically highlights through event study and OLS regression - the impact of stock price reaction to dividend increase and decrease in respect of 352 announcements during 2006-10 of top 100 companies listed in Bombay stock exchange (BSE). Findings: As predicted by the model, empirical results show that despite adverse tax provision resulting in depletion of shareholder’ wealth upon dividend distribution - high payout announcement causes rise in valuation and low pay out has just an opposite impact for stable, profitable, mature and high value firms that hardly need ‘dividend signaling’ to address information asymmetry problem as to their worth. Despite tax disadvantage, investors prefer and value dividend as it mitigates agency problem of retention. The finding is consistent with ‘life cycle theory’s prediction of high pay out by large and profitable firms. Practical Implication: The corporate managers of India, oblivious of the hidden agency cost associated with high retention, are conservative in setting their dividend policy, perhaps attributable to dividend tax – a direct cost of distribution. The findings of the study may encourage the CFOs and finance executives to have a relook at their existing dividend policy. At macro level as well, the fiscal policy makers should revisit the dividend distribution tax in its present form because of its potential of inefficient build up and use of resources through retention at firm level. Originality/ value: The findings of the study enrich the literature on agency theory and dividend policy formulation at micro level and to an extent public finance at macro level as well.