Sulagna Mukherjee ¹, Jitendra Mahakud ²

Affiliations
1 T.A. Pai Management Institute Manipal-576104 (Karnataka)
2 Department of Humanities and Social Sciences Indian Institute of Technology Kharagpur-721302

Abstract

The objective of the paper is to find out whether the trade-off and pecking order theories are mutually exclusive or complimentary to each other in determining the optimal capital structure of the Indian manufacturing companies during the period 1993-94 to 2007-08. We find that the trade-off and pecking order theories are complimentary to each other to determine the capital structure and therefore, companies' financing behavior is best explained by the modified pecking order theory. We also find that Indian manufacturing companies do have target leverage ratios and the adjustment speed towards the target has been around 40 percent.

Keywords

Trade-off Theory, Modified Pecking Order Theory, Target Leverage Ratio, Adjustment Speed

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Sulagna Mukherjee ¹, Jitendra Mahakud ²

Affiliations
1 TA Pai Management Institute, Manipal-576104 (Karnataka)
2 Department of Humanities and Social Sciences Vinod Gupta School of Management, IIT, Kharagpur-721 302

Abstract

The objective of this paper is to investigate the role of economic condition on determination of financial leverage and the adjustment speed to target leverage for the Indian manufacturing companies. Using the pooled data and the generalized method of moments estimation techniques, we find the evidence that for the Indian firms, macroeconomic condition plays an important role for determination of financial leverage, all the firms do have the target leverage ratio across macroeconomic conditions and the adjustment speed to target leverage has been pro-cyclical. We also find that financing behavior of the companies is different in good and bad economic conditions for both book and market leverage ratios.

Keywords

Financial Leverage, Macroeconomic Condition, Adjustment Speed, Pooled Data, Generalized Method of Moments, Target Leverage Ratio

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Sulagna Mukherjee ¹, Jitendra Mahakud ¹

Affiliations
1 Department of Humanities and Social Sciences Indian Institute of Technology Kharagpur- 721 302

Abstract

The objective of the paper is to investigate the role of historical 'market to book ratio' as a proxy for growth opportunity in determining the optimal capital structure of the Indian manufacturing companies during the period 1993-94 to 2007-08. This study specifies a partial adjustment model and uses the Generalized Method of Moments (GMM) technique to examine the role of historical market to book ratio, adjustment costs and other firm specific variable like size of the firm, profitability, non debt tax shield and tangibility for the determination of target capital structure. We find a robust relationship between the growth opportunity of the company and the capital structure dynamics. The adjustment speed towards the target has been varied between 12 to 39 percent across the various definitions of leverage. This study has the implications for the corporate managers in India to analyze the growth opportunity of the company and other firm specific variables like market to book ratio, size of the firm, profitability and tangibility while taking the appropriate financing decisions of the company.

Keywords

Leverage, Partial Adjustment Model, Generalized Method of Moments, External Financing Weighted Average of Market to Book Ratio, Equity Issue Weighted Average Market-to-book Ratio

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Jitendra Mahakud ¹, Arun Kumar Misra ²

Affiliations
1 Department of Humanities and Social Sciences IIT Kharagpur- 721 302
2 Vinod Gupta School of Management IIT Kharagpur- 721 302

Abstract

The leverage ratio of Indian companies has increased significantly due to easy availability of various means of finance in the globalization period. In this context, our purpose is to find out the impact of leverage and adjustment costs on performance of the companies. The dynamic panel data model is estimated by Generalized Method of Moments (GMM) method that yield consistent parameter estimates. We have found that the adjustment speed of the various corporate performance measures has been varied between 24-58 percent and leverage has the negative impact on performance. Other control variables like size of the firm, tangibility, short-term liabilities and time dummy have also significant impact on various corporate performance measures. The paper has practical implications for managers, investors and policy makers to take cost effective financing and investment decisions in the rising interest rate regime, and developing the collateralized borrowing market in India.

Keywords

Leverage, Corporate Performance, Dynamic Panel Data, Generalized Method of Moments, Economic Value Added, Partial Adjustment

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Saumya Ranjan Dash ¹, Jitendra Mahakud ¹

Affiliations
1 Department of Humanities and Social Sciences IIT Kharagpur- 721 302, IN

Abstract

The basic objective of this paper is to evaluate three alternative unconditional multifactor models to explain the cross-sectional stock return behavior in the context of Indian stock market. Fama and French time series regression approach is applied to examine the impact of market risk premium, size, bookto- market equity, momentum, and liquidity as risk factors on stock return. The empirical results show that three factor proposed by Fama and French (1993) retain their significance to explain the crosssection of stock return for test asset portfolios constructed beyond size and book-to-market equity characteristics. This finding is also robust to the inclusion of momentum and liquidity factors in four and five-factor model specifications. However, inconsistent with prior literature, book-to-market equity fails to explain the average return in case of large stocks. In the case of four-factor model, we found that pricing evidence of momentum profits fades in case of winner stocks and momentum strategy retains its value only for the sell side transactions i.e., loser portfolios. When the tests allow for the inclusion of liquidity factor in an augmented four-factor model, the results suggest that liquidity is priced and explains a cross-sectional variation in stock returns. The findings suggest that given the multi-dimensional nature of risk the choice of a five-factor model is apparently persuasive for consideration in investment decisions.

Keywords

Risk Factor, Multi-factor Model, Liquidity Risk, Momentum Strategy, Stock Return

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Saumya Ranjan Dash ¹, Jitendra Mahakud ²

Affiliations
1 Institute of Management Technology Ghaziabad, IN
2 Department of Humanities and Social Sciences IIT Kharagpur- 721 302, IN

Abstract

This paper tries to analyse the role of investor sentiment on stock returns in the Indian stock market. Following the top-down approach and by using various market related implicit sentiment proxies this paper attempts to construct an investor sentiment index for the sample period spanning from February 2003 till March 2011. The impact of sentiment risk on the cross sectional return variation of several double shorted value weighted portfolios have been investigated using multivariate time series estimation approach. Empirical findings suggest that, cross-sectional return variation is attributable to the sentiment effect and investor sentiment is a priced source of risk. Consistent with the prior literature the effect holds even after controlling for systematic risk factors like market excess return, size, book-to-market equity, momentum and liquidity. The negative pricing effect of sentiment risk on stock return is attributable to the fact that, since positive sentiment results in over valuation of stocks, the expected return for such stocks will be lower in the subsequent period.

Keywords

Investor Sentiment, Liquidity, Momentum, Sentiment Risk, Stock Return, Systematic Risk Factors

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Nishant B. Labhane ¹, Jitendra Mahakud ¹

Affiliations
1 Department of Humanities and Social Sciences, IIT Kharagpur, 721302, West Bengal, IN

Abstract

This paper attempts to identify the factors affecting the likelihood of paying dividends of Indian listed firms during the period 1994-95 to 2012-13. We find that dividend paying firms are larger in size, more profitable, less levered, and more mature than the non-dividend paying firms. The logit regression results suggest that the variables such as market-to-book ratio, financial leverage, business risk and dividend distribution tax have significant negative and variables like firm's maturity, size of the firm, profitability and liquidity have significant positive impact on the likelihood of paying dividends. The results are robust across the periods for Indian firms and consistent with the pecking order, transaction, signaling and firm life cycle theories of dividend.

Keywords

Dividend payout, Logit model, Investment opportunity, Financial leverage, Business risk, JEL Classification: G35, G30.

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Jitendra Mahakud ¹, Saumya Ranjan Dash ²

Affiliations
1 Department of Humanities and Social Sciences, Indian Institute of Technology Kharagpur, Kharagpur, West Bengal 721 302, IN
2 Indian Institute of Management Indore, Prabandh Shikhar, Rau-Pithampur Road, Indore, Madhya Pradesh 453556, IN

Abstract

This paper tries to review the theories and empirical evidences on various issues related to alternative capital asset pricing models. First it presents a brief review on various theories of capital asset pricing models followed by the review of the studies on the testing the various single and multifactor capital asset pricing models in both unconditional and conditional framework. Further, it discusses about the alternative arguments on the role of financial market anomalies on the determination of expected stock return and presents the critical review on whether alternative multifactor asset pricing models are able to capture the role of financial market anomalies in determining the expected stock return. The review of literature on these issues conclude that conditional asset pricing models perform better as compared to unconditional models, cross sectional regularity of the stock return has been associated with various financial market anomalies like size of the company, book to market ratio, momentum, and liquidity and they are not fully explained by the alternative asset pricing models.

Keywords

Unconditional and Conditional Capital Asset Pricing Models, Expected Stock Return, Single and Multifactor Asset Pricing Models, Financial Market Anomaly.

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