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Do Leverage, Dividend Policy and Profitability influence the Future Value of Firm? Evidence from India
everestINTRODUCTION
With the ushering of economic liberalization in 1992, Indian stock market has undergone veral changes over the last decade. The include introduction of new exchanges, massive computerization and electronic limit order book integrating the stock exchanges across the nation, establishing of clearing corporation and subquent introduction of new derivative products in the market. Perhaps the most important among the changes was the establishment of Securities and Exchange Board of India (SEBI) in 1992 as the market watchdog. SEBI, since it’s inception has strived in the direction of narrowing the information gap between Indian corporations and investors, enforce better corporate governance practices through guidelines, rules and regulations and through active market for corporate
control that has marked a new era in the Indian financial arena. The investors reveled their confidence through their participation in the primary and condary market. Large number of new companies came to the primary market over 1993-96 and the market capitalization of S&PCNX 500 has incread considerably over 1990s. India has emerged as an emerging economy with largest number of companies listed in its stock markets.
Over the last decade corporate governance has received considerable importance in Indian financial market. With the initiation of market for corporate control and activities in the merger and acquisition market, CEOs have assigned tremendous importance for creating value for their firms. Accordingly companies from different ctors (and/or ownership groups) have adopted different strategies to signal their清大教育
earning and growth potential over the years and thereby influence their stock prices. With this in the background this paper attempts to analyze the factors that influenced the future value of the companies listed in Indian stock markets and also how the effect of the factor changes over different categories of firms.
Background Literature
The well-developed and vibrant literature in modern corporate finance has its root in the minal paper by Franco Modigliani and Merton Miller (1958, 1963),
(M-M henceforth). This branch of finance started with the assumption of perfect information and complete markets. It postulates that in a typical neoclassical market with perfect competition, abnce of agency costs, transaction and banking costs, the average cost of raising fund for any firm is completely independent of its capital structure. With the same t of assumptions M-M (1963) argued that the value of the firm is unaffected by the dividend policy. However, over time many of the simplified assumptions were relaxed and subquent rearch showed capital structure does matter and there could exist optimal dividend policy in the modified M-M framework.
Academic literature over the last decade has documented the effect of different strategic factors influencing the firm values for the developed countries. Rappaport (1981, 1987) has ud value creation literature for corporate mergers and acquisition and underlined the importance of growth rate, operating profit, income tax rate and fixed capital investment as the major factor influencing the firms’ value. Recently some of the studies concentrated on emerging market to analyze the factors that influenced the firms’value in this market. Ben Naceur and Goaied (2002) investigated value creation process for Tunisian stock exchange using a random probit model with unbalanced panel d
ata. It considered that the managers’ succeeded creating value to its share holders if the market value of the share exceeds the book value of the corporation and vice versa. The authors considered three main determinants of value creation: financial policy, profitability and dividend policy.
In the modified M-M framework, literature has shown that firm’s performance depends on the capital structure (or financial policy). Ross (1977) argued that
more leverage would signal the investors about the improved firm prospect and influence the firm’s value in future. Increa in dividend payout increas the investors’ income at prent and signal the expected future cash flow for the corporation. Profitability is undoubtedly one of the major factors determining the firm value. Ben Naceur and Goaied(2002) argued that while profitability and debt have positive effect on the probability of crating future value, the pay-out have rever effect on the same.
India has one of the most developed stock markets in the world with large number of domestic and international players investing in Indian stock market. With maximum number of companies listed in the Indian stock exchanges from different industries and different ownership groups (e.g. business af
filiated firms, Indian standalone, foreign standalone) and with the emphasis on corporate governance practices, India has become an important and interesting destination for such studies. Among the available studies in this area, Sahu (2002) ud a sample of companies listed in BSE to explain the abnormal stock returns by dividend stability and found no statically significant result. Another study by Tuli and Mittal (2001) ud 101 Indian firms and found price earning ratio is significantly influenced by variability of market price and dividend pay out ratio.However, the authors did not find any significant effect of industry and ownership pattern on price to earning ratio.
This papers aims at determining the factors influencing the probability of future firm value for Indian corporations after controlling for the industry and time specific effects. In particular this study attempts to answer the following questions:（1）How the probability of future value creation is affected by firm’s profitability, financing pattern and the dividend pay-out policy?（2）Whether the firms belonging to business groups have different effect on probability of value creation?
Data
The primary source of the data for this paper is PROWESS databa, compiled by Center for Monitoring the Indian Economy (CMIE). This datat is similar to the COMPUSTAT databa in USA.
We have lected the firms that are prently included in S&PCNX 500 index. The accounting and stock price data for the
companies are extracted for the year 1989-90 to 2001-02 from Prowess datat for this study.So far we have done the univariate and bivariate analysis in the previous ction.To examine the factors effecting the future value creation of the firms listed in the Indian stock exchange we examine the effect of previous year’s leverage, dividend and profitability on the MBVR of the company in a multivariate framework.
Variable Description
Market to book value ratio (MBVR) is defined as the ratio of closing price of the equity to book value of equity at the end of the financial year. MBVR is the dependent variable for the OLS regression. For the logit model the dependent variable is a binary ries, which takes the value 1 if price to book value ratio is greater than one (i.e., market perceived that future value of the firm is going to increa) and zero otherwi.
define是什么意思The other variables of interest include tho reprenting Leverage Policy,Dividend Policy and Profitabilit y that have key bearing on the firms’ future value creation. While the ratio of total amount
of long-term debt to total amount of equity capital (LEVERAGE) is included to proxy the leverage policy of the corporation, the ratio of total dividend to total earning of the firm (PAY_OUT) i s included to capture the dividend policy of the same. The profitability of a company, on the other hand, is captured by the ratio of net profit to net worth of the firm, which is also known as return on equity (ROE).
To control for the size of the firm we consider total asts (ASSET) of the firm as a proxy variable. To control for the differenced arising due to the firms belonging to different business groups this paper considers different dummy variables. If the firm is Among the large number of listed companies, tho included in S&PCNX 500 are often considered for empirical studies for their liquid nature and reprentative characteristics.
Private Indian standalone then the dummy, D_PVT_IND, take the value one and zero otherwi. If, on the other hand, a firm is private foreign standalone then the dummy, D_PVT_FOR, take the value one and otherwi zero. Indian companies differ considerably access the industries. So industry dummies were ud to control
for industry specific heterogeneity. Since 1990, Indian economy has undergone veral changes, wh
ich have their influence on the corporate valuation. So time dummies were also included to control for the time trend. All the nominal variables are deflated by GDP deflator and expresd at constant price of 1987-88.
(Inrt Table-1 here)
Table 1: Descriptive statistics
(MBVR) is ratio of closing price of the equity to book value of equity at the end of the
financial year. LEVERAGE is the ratio of total amount of long-term debt to total amount of
equity capital.PAY_OUT is the ratio of total dividend to total earning of the firm. Return
on equity (ROE) is the ratio of net profit to net worth of the firm.ASSET total asts of the
firm.
Variable All Firms Large Firms Small Firms Group Firms
Indian
Standalone
Firms
Foreign Standalone
Firms
MBVR
LE VERAGE DIVIDEND P AY OFF
3.137
(5.993)
1.726
(4.140)
0.023
patriot
(0.029)
2.133
(3.537)
3.057
(7.151)
0.025
(0.028)
3.349
(6.372)
1.441
(3.063)
aragon桃花源记翻译及原文
0.023
(0.029)
2.833
高二英语短文改错(5.659)
1.973
(4.470)
0.024
(0.030)
2.850
(5.119)
1.247
(3.094)
0.024
(0.026)
5.776
联系人英文(8.255)
0.319
(0.484)
0.020
(0.023)
PROFITABILITY (ROE) 0.138
(0.367)
0.095bullion
(0.449)
0.148
(0.346)
0.133
(0.372)
0.168
(0.283)
0.148
(0.
Table 1 shows the mean values and the standard deviations (in parenthesis) of the variables under c
onsideration under six different cas (namely, all firms, large firms, small firms, group-affiliated firms, Indian standalone firms and foreign standalone firms). The descriptive statistics reported in Table 1 shows that the value of a firm, in terms of MBVR, is higher for the small firms and the foreign standalone firms. Large firms get more leverage than any other category of firms. Profitability of the firm, in terms of ROE, is higher for the Indian standalone companies. Table 2 shows the Pearson correlation coefficient matrix between the variables of interest. It shows that MBVR has significant negative correlation with leverage and size of the firm and positive correlation with dividend policy and profitability of the firm. In the Appendix Figure 1 and 4 show that with the ushering of economic liberalization there is a sharp ri in MBVR and ROE in the year 1992, which have gradually decread over the years. Figure 2 shows since post liberalization period, the leverage has shown an increasing trend. However, dividend payout policy does not depict any significant
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