Tarun K. Mukherjee

The behavior of the stock market in a developing economy

Abstract Applying Granger-type causality along with Akaikes final-prediction-error criterion on the Indian data over 1948–1984, this paper finds a significant causal (lagged) relationship between stock returns and some selected macro variables, including money supply, implying market inefficiency in the semi-strong sense.

A Survey of Corporate Leasing Analysis

This paper reports results of a survey on leasing practices of large American firms. The survey finds that most firms, in compliance with theory, (i) treat leasing as a financing decision, (ii) use IRR and net advantage to leasing models recommended in textbooks, and (iii) employ after-tax cost of debt to discount relevant cash flows. The survey finds that about half the firms surveyed view lease and debt as substitutes, that most firms consider risk of obsolescence as the dominant reason for leasing, and that a majority expect the new tax laws to have little effect on their future leasing activities.

Inter-industry differences and the impact of operating and financial leverages on equity risk

Abstract Based on the traditional assumption that the degree of combined leverage is strictly a product of operating and financial leverages (DOL and DFL), Mandelker and Rhee (1984) develop an interesting beta decomposition model. Two testable implications of their model, which apply to all firms, are that: (1) changes in DOL and/or DFL should exert a positive impact upon beta; and (2) a negative relationship should hold between DOL and DFL. Huffman (1983), however, questions this multiplicity assumption and, by arguing that a firms capacity decision is endogenous, posits that an interaction prevails between a firms DOL and DFL. An implication of Huffmans model is that the relationship between DOL, DFL, and beta depends on a firms capacity decision and, therefore, may vary across industries. By employing a vector-autoregressive causality approach, this study finds some evidence in support of Huffmans position.

Why firms adopt and discontinue new-issue dividend reinvestment plans

We examine several arguments—past performance, capital structure adjustment, and broadening the ownership base—involving why firms adopt and discontinue new-issue dividend reinvestment plans (DRPs). We test hypotheses for each argument by analyzing financial characteristics for firms adopting and discontinuing new-issue DRPs compared with matching non-DRP firms. The evidence provides some support for the past performance argument but none for the capital structure adjustment argument. Limited support also exists for the broadening the shareholder base argument. Overall, the results support the notion that firms needing funds initiate new-issue DRPs, and then discontinue them when the need for external funding diminishes.

The Capital Budgeting Process of Healthcare Organizations: A Review of Surveys.

Several surveys have been administered over the last 40 plus years to learn about capital budgeting practices of healthcare organizations. In this report, we analyze and synthesize these surveys in a four-stage framework of the capital budgeting process: identification, development, selections, and post-audit. We examine three issues in particular: (1) efficiency of for-profit hospitals relative to not-for-profit hospitals, (2) capital budgeting practices of the healthcare industry vis-à-vis other industries, and (3) effects of healthcare mergers and acquisitions on capital budgeting decisions. We found indirect evidence that for-profit hospitals exhibited greater efficiency than not-for-profit hospitals in recent years. The acquisition of not-for-profits by for-profits is credited as the primary reason for growth of multihospital systems; these acquisitions may have contributed to the more efficient capital budgeting practices. One unique attribute of healthcare is the dominant role of physicians in almost all aspects of the capital budgeting process. In agreement with some researchers, we conclude that the disproportionate influence of physicians is likely to impede efficient decision making in capital budgeting, especially for nonprofit organizations.

The Distribution of the Capital Purchase Program Funds: Evidence from Bank Internal Capital Markets

We investigate the role played by the internal capital markets of bank holding companies in the distribution of the Capital Purchase Program funds to subsidiaries. We find that while all banks used a similar internal capital allocation to support their subsidiaries, program participants transferred more capital to their subsidiaries than nonparticipants. Smaller bank subsidiaries with lower capital and earnings received more capital than other subsidiaries. Our results support the argument that the distribution of capital was done in accordance with regulatory requirements that mandate bank holding companies to act as a source of strength for their subsidiaries.

Corporate Cash Holdings and Exposure to Macroeconomic Uncertainty

This study aims to clarify the understanding on the relationship between the firm’s cash holdings and its causes by introducing the more detailed relationship between cash holdings and macroeconomic uncertainty. While previous literature tries to explain the level of cash holdings mainly by the firm-level variables with the partial inclusion of macroeconomic uncertainty, this study considers the full impact of the macroeconomic uncertainty on the change in the level of cash holdings by understanding and introducing the firm’s heterogeneous exposure to macroeconomic uncertainty. Firms’ heterogeneity to macroeconomic uncertainty is introduced in the test to see if the heterogeneity can tell the difference in the change in the level of cash holdings. This paper finds that macroeconomic uncertainties measured by difference macroeconomic condition variables are significant and contribute to the change in cash holdings. Additionally, this paper shows that the firms’ different level of exposure to macroeconomic uncertainty can cause the different degree of cash holdings and that firms with the higher level of exposure have the higher level of cash holdings. This paper can be improved and expanded in many ways such as an expansion with the inclusion of international macroeconomic variables as additional significant factors for the change in the level of firms’ cash holdings.

Deferred CEO Compensation and Firm Investment Decisions

For more than a decade, to reduce the agency problem, various ways have been examined on how to align the interest of manager with shareholders. However, evidence and empirical findings are conflicting on the agency problem. Recently, deferred compensation as one of incentive compensations draws the attention as a means to incentivize CEOs to make them work for the firm. However, it is still not evident if deferred compensation has effect on aligning CEOs with the firm’s goal possibly due to the issue on data. Therefore, the first essay investigates if deferred compensation has the effect on the agency problem and on the improvement of the firm performance after dealing with the data issue. This paper mainly aims to investigate if there is a non-linear relationship between the investment choice problem and the deferred compensation as Jensen and Meckling (1976) claim. This paper concludes that deferred compensation from NQDC table has positive and significant effect on the firm performance and the investment choice problem. Following McConnell and Servaes (1990), this paper finds the curvilinear relationship between Tobin’s Q and the deferred compensation and can confirm Jensen and Meckling (1976) theoretical application.

The Quality of Corporate Governance and the Length it Takes To Remove a Poor-Performing CEO

In this paper, we investigate the effects of internal corporate governance on the length it takes to remove a CEO after the initial sign of poor firm performance. We find that firms that have a better quality of internal corporate governance are quicker to remove poor-performing CEOs. This result persists after controlling for other factors that might influence the CEO removal decision.