Effect
of Non-Traditional Debt on Financial Risk: Evidence from Indian
Manufacturing Firms
-- L V L N Sarma, M Thenmozhi and S K Preeti
Non-Traditional
Debt (NTD) instruments, particularly innovative instruments,
have been the most preferred choice of firms in capital structure
financing. This paper attempts to examine the effect of presence
of non-traditional debt on the financial risk of a firm with
the determinants of capital structure as control variables.
The determinants of capital structure, identified from the
literature include operating leverage, volatility of earnings,
value of collateral assets, non-debt tax shield, profitability,
firm size, firm size relative to economy, interest coverage
ratio, bankruptcy cost and cash constraint. The results show
that firms with NTD have higher leverage and presence of NTD
has a positive influence on financial leverage. It also shows
that the relationship is robust in controlling determinants
of leverage and accounting, since NTD increases the ability
of the model to explain cross-sectional leverage. The analysis
shows that results are robust considering three different
measures of leverage for the transition and post-transition
period. The firms with NTD have low volatility of earnings,
low non-debt tax shield, low profitability, low market to
book ratio, low cash constraint, high volatility of collateral
assets, large firm size and high bankruptcy cost in comparison
to firms without NTD. The findings of the study confirm the
pecking order hypotheses.
©
2004 The IUP Journal of APPLIED FINANCE.
Value
Creation Through Mergers: The Myth and Reality
-- Ashutosh Dash
In
the wake of the recent changes in the Indian economic scenario,
many companies have embraced mergers as a restructuring tool
for salvation. Such a move, though supported by powerful arguments
and theories, is questioned in many empirical studies. Based
on a sample of both related and unrelated mergers completed
in mid-nineties, the present paper examines the economic consequences
of mergers with a view of resolving the conflict. On empirical
examination it is found that the modern mergers are primarily
motivated by the firms with above industry-average performance
and this trend continues to persist over the time. The event
study methodology employed to assess the extent of value creation
by mergers, indicates that on an average mergers lead to value
destruction, irrespective of their pattern over a long period
of time and the destruction of value is relatively greater
in case of unrelated mergers. In the light of the above empirical
result, the paper draws a contradictory conclusion to the
popular belief of merger as a means of corporate salvation
and declares it to be a myth.
©
2004 The IUP Journal of APPLIED FINANCE.
The
Impact of Indian Overseas Listings on the Volatility of the
Underlying Shares
-- Manoj Kumar
Between
May 1992 and June 2001, 72 Indian companies tapped the international
capital markets with their equity offerings in the form of
Depositary Receipt (DR) programs. Initially, most of these
programs were in the form of Global Depositary Receipts (GDRs)
and were traded on London and Luxembourg stock exchanges.
Since 1999, many Indian companies have been listing their
American Depositary Receipts (ADRs) on the US stock exchanges.
Home market responses to issuance of DRs are of interest to
the policy makers, investors, market intermediaries, CFOs,
and finance scholars. Policy makers in emerging markets are
increasingly concerned about the consequences for the domestic
equity market when companies list their stocks abroad. The
present paper assesses the impact of listing of ADRs/GDRs
on the volatility of the firm's underlying domestic shares
by using a sample of 68 Indian DR programs that listed on
the foreign markets between January 1, 1996 and June 30, 2001.
Most of the firms in our sample recorded a decline in volatilities
of their underlying domestic shares in the period following
the listings of their DR programs on the foreign exchanges.
Our results are similar to the results of Newton et al., (1998),
Rodrigues et al., (1999) and Costa et al., (2000), who studied
samples of Latin American firms, which issued or listed their
ADR programs on the US markets. Overall, we have concluded
that the volatilities of the underlying domestic shares of
the foreign listed Indian firms have reduced aftermath to
listings of their DR programs on the foreign stock exchanges.
©
2004 The IUP Journal of APPLIED FINANCE.
Impact
of Index Futures on Indian Stock Market Volatility: An Application
of GARCH Model
-- Nupur Hetamsaria and Saikat Sovan Deb
The
exchange traded index futures were launched in India in June
2000. Subsequently, other derivative products like the index
options, stock options, stock futures, were launched. Derivative
products are turning more and more popular day by day. Nifty
futures are scaling new heights and breaking records daily,
in terms of volumes. The impact that the derivatives market
has on the underlying spot market remains an issue debated
again and again, with arguments both in favor and against
them. This study aims to study the impact of the introduction
of stock index futures on the volatility of the Indian spot
markets. The issues addressed in this paper are: Firstly,
does the introduction of stock index futures reduce stock
market volatility? Secondly, if there is a reduction in the
volatility of the stock market post futures, are there no
other reasons that could have caused such a reduction? And
thirdly, if the futures effect is confirmed, is the effect
immediate or delayed? The amended GARCH model is used to study
the above objectives. The results obtained show that the results
remain consistent with the studies for other emerging markets,
like Malaysia and Italy. That is, the introduction of futures
results in a reduction in stock market volatility. Also, apart
from the introduction of stock index options in June 2001,
there are no other factors that had caused this reduction.
However, we found that the futures effect is delayed on NSE.
©
2004 The IUP Journal of APPLIED FINANCE.
Towards
a Formal Theory of Bank Management
-- Rajas Parchure and S Uma
Banks
earn profits out of the spread between interest on deposits
and interest on loans. Matching bank assets with liabilities
is essential to ensure stability in operations. This is not
an easy task because banks encounter uncertainties on both
sides of the balance sheet. The purpose of this paper is to
model these uncertainties and to determine the interest rates
that should be viably charged by applying actuarial science.
©
2004 The IUP Journal of APPLIED FINANCE.
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