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The IUP Journal of Applied Finance


October' 04
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Focus Areas
  • Business Environment

  • Regulatory Environment

  • Equity Markets

  • Debt Market

  • Corporate Finance

  • Financial Services

  • Portfolio Management

  • International Finance

  • Risk Management

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Effect of Non-Traditional Debt on Financial Risk: Evidence from Indian Manufacturing Firms

Value Creation Through Mergers: The Myth and Reality

The Impact of Indian Overseas Listings on the Volatility of the Underlying Shares
Impact of Index Futures on Indian Stock Market Volatility: An Application of GARCH Model
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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.

Article Price : Rs.50

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.

Article Price : Rs.50

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.

Article Price : Rs.50

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.

Article Price : Rs.50

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.

     

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Automated Teller Machines (ATMs): The Changing Face of Banking in India

Bank Management
Information and communication technology has changed the way in which banks provide services to its customers. These days the customers are able to perform their routine banking transactions without even entering the bank premises. ATM is one such development in recent years, which provides remote banking services all over the world, including India. This paper analyzes the development of this self-service banking in India based on the secondary data.

The Information and Communication Technology (ICT) is playing a very important role in the progress and advancement in almost all walks of life. The deregulated environment has provided an opportunity to restructure the means and methods of delivery of services in many areas, including the banking sector. The ICT has been a focused issue in the past two decades in Indian banking. In fact, ICTs are enabling the banks to change the way in which they are functioning. Improved customer service has become very important for the very survival and growth of banking sector in the reforms era. The technological advancements, deregulations, and intense competition due to the entry of private sector and foreign banks have altered the face of banking from one of mere intermediation to one of provider of quick, efficient and customer-friendly services. With the introduction and adoption of ICT in the banking sector, the customers are fast moving away from the traditional branch banking system to the convenient and comfort of virtual banking. The most important virtual banking services are phone banking, mobile banking, Internet banking and ATM banking. These electronic channels have enhanced the delivery of banking services accurately and efficiently to the customers. The ATMs are an important part of a bank’s alternative channel to reach the customers, to showcase products and services and to create brand awareness. This is reflected in the increase in the number of ATMs all over the world. ATM is one of the most widely used remote banking services all over the world, including India. This paper analyzes the growth of ATMs of different bank groups in India.
International Scenario

If ATMs are largely available over geographically dispersed areas, the benefit from using an ATM will increase as customers will be able to access their bank accounts from any geographic location. This would imply that the value of an ATM network increases with the number of available ATM locations, and the value of a bank network to a customer will be determined in part by the final network size of the banking system. The statistical information on the growth of branches and ATM network in select countries.

Indian Scenario

The financial services industry in India has witnessed a phenomenal growth, diversification and specialization since the initiation of financial sector reforms in 1991. Greater customer orientation is the only way to retain customer loyalty and withstand competition in the liberalized world. In a market-driven strategy of development, customer preference is of paramount importance in any economy. Gone are the days when customers used to come to the doorsteps of banks. Now the banks are required to chase the customers; only those banks which are customercentric and extremely focused on the needs of their clients can succeed in their business today.

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Applied Finance