Satish Kumar

Effect of Working Capital Management on Firm Profitability

The main aim of this article is to examine the effect of working capital on profitability of Indian firms. We collected data about a sample of 263 non-financial BSE 500 firms listed at the Bombay Stock (BSE) from 2000 to 2008 and evaluated the data using OLS multiple regression. The findings of our study significantly depart from the various international studies conducted in different markets. The results reveal that working capital management and profitability is positively correlated in Indian companies. The study further reveals that inventory of number of days and number of days accounts payable are negatively correlated with a firm’s profitability, whereas number of days accounts receivables and cash conversion period exhibit a positive relationship with corporate profitability. The present study contributes to the existing literature by examining the effect of working capital management on profitability in the context of an emerging capital market such as India.

Association of EVA and accounting earnings with market value: evidence from India

Purpose – The purpose of this paper is to examine the claim of economic value added (EVA) proponents about its superiority as a corporate financial performance measure, compared to traditional performance measures in non‐financial Indian companies and provide empirical evidences.Design/methodology/approach – The paper uses a sample of 873 firms‐year observations from the Indian market and applies pooled ordinary least square regression to test the relative and incremental information content of EVA and other accounting‐based measures in explaining the market value added.Findings – The results about relative information content test reveal that NOAPT and OCF outperform EVA in explaining the market value of Indian companies. Incremental information content test shows that EVA makes a marginal contribution to information content beyond traditional performance measures such as NOPAT, OCF, EPS and RONW, etc. Overall the authors results do not support the hypothesis that EVA is superior to traditional accounti...

Working capital management: a literature review and research agenda

Purpose - – The purpose of this paper is to review research on working capital management (WCM) and to identify gaps in the current body of knowledge, which justify future research directions. WCM has attracted serious research attention in the recent past, especially after the financial crisis of 2008. Design/methodology/approach - – Using systematic literature review (SLR) method, the present study reviews 126 articles from referred journal and international conferences published on WCM. Findings - – Detailed content analysis reveals that most of the research work is empirical and focuses mainly on two aspects, impact of working capital on profitability of firm and working capital practices. Major research work has concluded that WCM is essential for corporate profitability. The major issues with prior literature are lack of survey-based approach and lack of systematic theory development study, which opens all new areas for future research. The future research directions proposed in this paper may help develop a greater understanding of determinants and practices of WCM. Practical implications - – Till date, literature on classification of WCM has been almost non-existent. This paper reviews a large number of articles on WCM and provides a classification scheme in to various categories. Subsequently, various emerging trends in the field of WCM are identified to help researchers specifying gaps in the literature and direct research efforts. Originality/value - – This paper contains a comprehensive listing of publications on the WCM and their classification according to various attributes. The paper will be useful to researchers, finance professionals and others concerned with WCM to understand the importance of WCM. To the best of the authors’ knowledge, no detailed SLR on this topic has previously been published in academic journals.

Further evidence on relative and incremental information content of EVA and traditional performance measures from select Indian companies

Purpose - The main objective of this study is to examine the claim of economic value added (EVA) proponents about its superiority as a financial performance measure compared to five traditional performance measures, i.e. net operating profit after tax (NOPAT), cash flow from operations (OCF), earnings per share (EPS), return on capital employed (ROCE) and return on equity (ROE) in Indian manufacturing sector, and simultaneously provide its empirical evidences. To achieve this, relative and incremental information content of various performance measures and their relationship with market value added (MVA) is tested and examined. Design/methodology/approach - Principal component analysis (PCA) is one of the important multivariate methods utilized in business research for data reduction, latent variable modeling, multicollinearity resolution, etc. The present sample consists of 608 firm-year observations from the Indian manufacturing sector for the period 2000-2007. Firstly, principal component analysis (PCA) is employed to determine the important variables that explain market value. Secondly, alongside PCA, multiple regression models (OLS) are used to examine the relative and incremental information content of EVA and traditional performance measures. Findings - These results about PCA reveal that variables like NOPAT, OCF, ROE, ROCE and EVA have maximum influence on the market value (MVA) of the sample companies, whereas EPS has a negative loading, so, EPS is discarded for further analysis. Further, the PCA loading matrix reveals that NOPAT, OCF, ROE and ROCE outscore EVA. The regression results regarding the relative information content test reveal that NOAPT and OCF outperform EVA in explaining the market value of Indian companies. The incremental information content test shows that EVA makes a marginal contribution to information content beyond NOPAT, OCF, ROCE and ROE. Overall, these empirical results about Indian companies do not support the Stern Stewart hypothesis that EVA is superior to traditional accounting-based measures in association with market value of the firm. Originality/value - The study concludes that along with financial variables, other non-financial variables such as employees, product quality, etc., should be considered in order to capture the unexplained variation in the market value of Indian companies.

Behavioural biases in investment decision making – a systematic literature review

Purpose - – The purpose of this paper is to systematically review the literature published in past 33 years on behavioural biases in investment decision-making. The paper highlights the major gaps in the existing studies on behavioural biases. It also aims to raise specific questions for future research. Design/methodology/approach - – We employ systematic literature review (SLR) method in the present study. The prominence of research is assessed by studying the year of publication, journal of publication, country of study, types of statistical method, citation analysis and content analysis on the literature on behavioural biases. The present study is based on 117 selected articles published in peer- review journals between 1980 and 2013. Findings - – Much of the existing literature on behavioural biases indicates the limited research in emerging economies in this area, the dominance of secondary data-based empirical research, the lack of empirical research on individuals who exhibit herd behaviour, the focus on equity in home bias, and indecisive empirical findings on herding bias. Research limitations/implications - – This study focuses on individuals’ behavioural biases in investment decision-making. Our aim is to analyse the impact of cognitive biases on trading behaviour, volatility, market returns and portfolio selection. Originality/value - – The paper covers a considerable period of time (1980-2013). To the best of authors’ knowledge, this study is the first using systematic literature review method in the area of behavioural finance and also the first to examine a combination of four different biases involved in investment decision-making. This paper will be useful to researchers, academicians and those working in the area of behavioural finance in understanding the impact of behavioural biases on investment decision-making.

A conceptual framework for identifying financing preferences of SMEs

The aim of this study is to propose a conceptual framework for identifying the financing preferences of small and medium enterprises (SMEs) by analysing the factors affecting the financing decisions of SMEs. The formulation of the framework is based on a review of the literature on determinants of the capital structure of SMEs and studies related to SME financing. The design of this study is centred on the problem of inadequate finance faced by SMEs, which ultimately affects their performance. The major problems associated with inadequate finance are (1) accessibility of limited financial sources (demand gap) due to the effect of various quantitative and qualitative variables on capital structure of SMEs, (2) limited availability of finance for SMEs (supply gap), (3) lack of awareness about the approachability towards potential sources of finance (knowledge gap) and (4) reluctance of financial institutions in providing funds to SMEs (benevolence gap). By assessing various studies, we developed a conceptual framework for understanding the financing preferences of SMEs. This study contributes to the literature by addressing the existent financing gap for SMEs and makes an effort to diagnose the problem of access to finance in the light of determinants of capital structure and sources of finance accessible and available to SMEs. The proposed framework will assist not only policy-makers in improving lending-infrastructure and related technologies and but also managers in designing an optimal capital structure for their firms.

Financing patterns of SMEs in India during 2006 to 2013 – an empirical analysis

The main purpose of the study is to provide a comprehensive view on the financing state of small and medium enterprises (SMEs) in India. Using the information from the financial statements of 1524 SMEs, provided by the database of Centre for Monitoring the Indian Economy, PROWESS, it analyses the financial ratios of SMEs and the components of debt during the period of 2006–2013. The study describes the financing pattern of SMEs by examining differences across the firm characteristics, namely size, age, ownership, sector, and region. The major findings revealed the dependence of SMEs on short-term debt, and the most frequently used sources of finance are trade credit and bank loans. Hierarchical regression analysis revealed that the major determinants of the capital structure of SMEs are age, profitability, tangibility, and liquidity. Overall, this study concludes that the financing condition of SMEs in India needs to be improved and, therefore, suggests exploring new financing avenues specifically designed to solve the problems of SME financing.

Research on capital structure determinants: a review and future directions

Purpose n n n n nThe purpose of this paper is to study the status of studies on capital structure determinants in the past 40 years. This paper highlights the major gaps in the literature on determinants of capital structure and also aims to raise specific questions for future research. n n n n nDesign/methodology/approach n n n n nThe prominence of research is assessed by studying the year of publication and region, level of economic development, firm size, data collection methods, data analysis techniques and theoretical models of capital structure from the selected papers. The review is based on 167 papers published from 1972 to 2013 in various peer-reviewed journals. The relationship of determinants of capital structure is analyzed with the help of meta-analysis. n n n n nFindings n n n n nMajor findings show an increase of interest in research on determinants of capital structure of the firms located in emerging markets. However, it is observed that these regions are still under-examined which provides more scope for research both empirical and survey-based studies. Majority of research studies are conducted on large-sized firms by using secondary data and regression-based models for the analysis, whereas studies on small-sized firms are very meager. As majority of the research papers are written only at the organizational level, the impact of leverage on various industries is yet to be examined. The review highlights the major determinants of capital structure and their relationship with leverage. It also reveals the dominance of pecking order theory in explaining capital structure of firms theoretically as well as statistically. n n n n nOriginality/value n n n n nThe paper covers a considerable period of time (1972-2013). Among very few review papers on capital structure research, to the best of authors’ knowledge; this is the first review to identify what is missing in the literature on the determinants of capital structure while offering recommendations for future studies. It also synthesize the findings of empirical studies on determinants of capital structure statistically.

Working capital management and firm profitability: a meta-analysis

Purpose - The main objective of this study is to quantitatively aggregate the findings of prior literature on the effect of Working capital management (WCM) on corporate profitability using the meta-analysis technique developed by Hunter et al. (1982). Design/methodology/approach - A set of 46 research articles that directly studied the relationship between WCM and profitability was analyzed for the purpose. In addition to overall meta-analysis, a detailed subgroup study was also conducted to test whether the differences in results are due to moderating effects related to different profitability proxies, economic development of a specific country, and size of the firms under study. Findings - The findings of this meta-analysis confirm that WCM is negatively associated with profitability, which means an aggressive WCM policy leads to higher profitability. Overall, and in all the subgroup studies, the cash conversion cycle (CCC) was found to be negatively associated with profitability. Originality/value - Unlike narrative literature review papers, this meta analysis provides quantitatively aggregate evidence on the relationship of WCM and firms’ profitability. To the best of authors’ knowledge no previous meta-analysis paper is published on the topic.

Evidence on rationality and behavioural biases in investment decision making

Purpose - The purpose of this paper is to investigate the relationship between rational decision-making and behavioural biases among individual investors in India, as well as to examine the influence of demographic variables on rational decision-making process and how those differences manifest themselves in the form of behavioural biases. Design/methodology/approach - Using a structured questionnaire, a total of 386 valid responses have been collected from May to October 2015. Statistical techniques like Findings - The findings show that the structural path model closely fits the sample data, indicating investors follow a rational decision-making process while investing. However, behavioural biases also arise in different stages of the decision-making process. It further explores that gender and income have a significant difference with respect to rational decision-making process. Male investors are more prone to overconfidence and herding bias in India. Research limitations/implications - The findings of the study have significant implication for the individual investors. It is recommended that if individuals are aware about the biases, they may become alert before taking irrational investment decisions. Originality/value - To best of the authors’ knowledge, the present study is a first of its kind to investigate the relationship between rational decision-making and behavioural biases among individual investors in India.