This paper analyzes the trends in retained earnings of Public Limited Companies (PULCos), Private
Limited Companies (PRLCos) and Foreign Companies (FRCos) in India during the period 1966-67 to
2001-02, and estimates panel data models by using data for 500 companies of S&P CNX 500 Index of
the National Stock Exchange, India for the period 1996-97 to 2003-04, for empirically identifying the
determinants of corporate retained earnings. The paper finds that the corporate retained earnings in India
have not increased much and have remained at a relatively low level throughout the period. Further, the
profits after tax, investment opportunities, availability of external funds, cost of borrowings, dividend policy,
and the shareholding patterns have been the major determinants of retained earnings of the Indian
joint-stock companies.
The stable and sustainable national or sectoral growth crucially hinges on economic units’
own-savings. From the point of view of risk and cost, their own-savings are the best source
of finance for the companies (Myers and Majluf, 1984). There are no transaction and
bankruptcy costs associated with the retained profits of companies (Altman, 1993).
Internal finance has an advantage of easy availability, and it effectively represents infusion
of additional equity capital. The use of retained earnings, in contrast to external equity,
eliminates issue costs and losses on account of underpricing (Chandra, 2002). Thus, the
corporate retained earnings are a very important source of finance for the firms. The
retention ratio of the joint-stock companies in India particularly that of public limited
companies has been relatively low in many years. In contrast to the theoretical
expectation, and unlike in many other countries, the reserves and surplus (internal
resources) have not been having the first rank in the “pecking order” of choice of
financing by the Indian companies. Therefore, a study of factors, which influence the
decision of companies to retain a part of their net earnings, can throw light on this issue.
In this context, the major objective of this paper is to analyze the behavior of corporate
retained earnings in India.
While the trends in corporate savings have been studied in respect of Public Limited
Companies (PULCos) and Private Limited Companies (PRLCos) during the period
1966-67 to 2001-02, the determinants of corporate retained earnings have been studied
by using panel data pertaining to 500 companies listed in S&P CNX 500 index for the
period 1996-97 to 2003-04, the period of liberalization. The major sources of data are
the company finance studies by the Reserve Bank of India (RBI) and Prowess database
of CMIE. |
