| Capital
Structuring Decision in a Competitive Market Environment
-- MS Narasimhan and S Vijayalakshmi
Internal
and external competition has increased the business risk of
Indian industries during the last ten years. Since strategies
aimed to acquire competitive strength require considerable
funding, firms need to adopt appropriate financial policies
to mobilize risk capital. An analysis of the firm level data
of the Indian industries shows that there is no conscious
effort on the part of industries to mobilize internal and
external equity to take up such strategies. Indian industries
report high level of debt and follow liberal dividend policy
despite being exposed to high level of business risk. While
the high level of debt reduces the borrowing capacity, the
negative growth of return reduces the ability of raising equity
finance. A liberal dividend payout policy is also found to
be inconsistent in the current situation.
©
2004 The IUP Journal of APPLIED FINANCE.
Effect
of RPL-RIL Merger on Shareholder's Wealth and Corporate Performance
-- Rajesh Kumar
Mergers,
Acquisitions, and Corporate Control represent a major force
in the modern financial and economic environment. These have
become corporate policy issues. The general rubric of corporate
synergy signifies that value created by the combination of
firms may result in more efficient management, economies of
scale, improved production technique, the combination of complementary
resources, the redeployment of profitable uses, the exploitation
of market power or any number of value creating mechanisms.
For a firm characterized by an objective of stockholder wealth
maximization the appropriate test of a Merger's success is
the Merger's effect on stock prices. In an efficient capital
market, investor's expectations of the merger's future benefit
should be fully reflected in stock prices by the merger date.
Formally if the capital markets are semi strong efficient,
then the value of future benefits should be fully reflected
by the first public announcement of the merger and should
certainly be fully reflected by somewhat later merger date.
The increase in the equity value of the acquiring firm in
the wake of a successful merger is a compelling evidence for
the synergy theory of mergers. This study analyses the Reliance
Industries Limited merger with Reliance Petroleum Limitedthe
largest ever merger in India. The study examines the effect
of the merger on the wealth of the shareholders of Reliance
Industries Limited and also on post merger corporate performance.
The results fail to support the capitalization hypothesis
that merger gains are captured at the beginning of the merger
programs. We find that the stockholders suffer loss for different
time window period around the announcement period. The announcement
day return was found to be 4.78%. But the average abnormal
return from 20 days before until 20 days after the announcement
period was found to be0.17%. Merged firm did not show improved
operating performance in terms of per share ratio.
©
2004 The IUP Journal of APPLIED FINANCE.
Impact
of Index Derivatives on S&P CNX Nifty Volatility: Information
Efficiency and Expiration Effects
--
M Thenmozhi and M Sony Thomas The
aim of this paper is to examine the impact of derivatives
trading and cash market volatility in the Indian context.
The volatility is examined considering the day-of-the week
effect, domestic market factors and world market movements
using GARCH models. The change in volatility and information
efficiency is examined for pre and post derivatives period.
The analysis shows that the introduction of index futures
and options has reduced spot market volatility. Persistence
of volatility is reduced in post-derivatives period and day-of-the-week
effect is found to be insignificant after the introduction
of derivatives. The results provide evidence of increased
market efficiency in the Indian stock market after the introduction
of derivatives. The study shows that both S&P CNX futures
and option contracts have a stabilizing effect on the underlying
stock market and supports the "market completion"
hypothesis and rejects the "destabilizing forces hypothesis".
©
2004 The IUP Journal of APPLIED FINANCE.
On
the Determinants of FDI and Portfolio Inflows: A Cross-country
Study
-- R Venkateswarlu and MVS Kameshwar Rao
Previous
empirical investigations have found that cross country variation
in FDI inflow can be explained by factors such as market size
and its growth, R&D intensity, skill intensity, economies
of scale, tariff barriers, accumulated experience with a given
economy, exchange rate differential, dependence on host country
raw materials and political stability. This discussion paper
aims at re-exploring the determinants of FDI inflow across
countries on the basis of the most recent data available.
The paper also brings into focus the determinants, if any,
of cross-country variation in portfolio flows and the links
between FDI and such flows. The following are the principal
findings of the paper. FDI determinants were found to be the
level of per capita GDP and growth rate of GDP. Attracting
FDI to low income economies is thus no easy task. The implication
is clear. A good deal of homework by the host country is a
must if the country is serious about relatively large magnitudes
of FDI (Note: During 1995-99, average annual per-capita FDI
into India was $3bn and the least among the 67 economies considered
here). There is a strong relationship between per capita GDP
(positive), inflation rate (negative), per capita reserves
(negative) and per capita Portfolio Investment. The first
two variables' implication is that robust economies with fiscal
and monetary discipline are the sought after locations by
Portfolio Investors. The negative coefficient of per capita
reserves is interpreted as a reflection of the fact that economies
with strong reserves send out portfolio investments.
©
2004 The IUP Journal of Applied Finance. |
