Chapter 6. Impact of Firm-Specific Attributes on Shareholder Value Creation of Selected Indian Companies

Transcription

1 Chapter 6 Impact of Firm-Specific Attributes on Shareholder Value Creation of Selected Indian Companies 6.1 Introduction Shareholder value creation has become the motto of most blue chip companies since late nineties. The quest for long term value creation has provided a common language to employees across all operating and staff functions. It has directed all management decisions to be modeled, monitored, communicated and compensated towards the most fundamental corporate objective i.e. to bring an improvement in the value addition to the shareholders investment. In a market-driven economy, there are a number of companies that create wealth whereas others certainly destroy it. As a result, corporate executives and managers may seek to inquire about the fundamental factors that cause the difference between the best and the worst performing companies and ultimately derive the long-term sustainable shareholder value. In order to enhance the shareholder value, each company thus, needs to develop a framework of such drivers and their interaction pattern. Thus, the present chapter deals with identifying the answer of a decisive question i.e. What drives Shareholder Value in Indian Corporate Sector. It attempts to identify the significant firm-specific attributes that can presumably have the considerable impact on the shareholder value creating capabilities of the selected Indian companies. The primary objectives of the present study are: To what extent the firm-specific characteristics determine the shareholder value of selected Indian companies and Whether the significant firm-attributes are common for both the dimensions of shareholder value i.e. accounting based (EVA) as well as market-based (MVA and Tobin s Q). 6.2 Sample Description and Database Sample Size, Study Period and Data Sources remain the same as described in Chapter 5, Section 5.2.

2 6.3 Model Development To assess the predictive power of a set of corporate attributes on the shareholder value of selected Indian companies, the study uses the tool of Panel Data Regression Analysis. The explanatory variables used in the study are firm-specific characteristics as described in table 6.1. Firm s shareholder value creation being the dependent variable has been taken as a function of various firm-specific characteristics like age, size, profitability, risk etc as shown below: Shareholder Value Creation = f {Age, Size, Profitability, Risk, Efficient Resource Management, Liquidity, Marketing Expenditure and Research & Development Expenditure} i.e. Y it = α + β 1 X it + β 2 X it + β 3 X it + β 4 X it + β 5 X it + β 6 X it + β 7 X it + β 8 X it + e it The dependent variable in the above equation is the shareholder value i.e. (EVA/MVA/Tobin s Q) for firm i in period t. As each cross-sectional unit (company) has the same number of time series observations, the study uses the balanced panel. X 1, X 2, X 3 X 8 are the various firm-specific attributes (as defined in table 6.1). A brief explanation of the all the variables incorporated in the study are given below: 6.4 Choice of Variables Dependent Variables As shareholder value creation has become the fundamental goal of every corporation, companies and their management need to be evaluated on the basis of their value creation capabilities. But how does one measure the wealth creation is the crucial question. Stern Stewart & Company, the New York based Consultancy Firm, has advocated two measures i.e. Economic Value Added (EVA) and Market Value Added (MVA) to assess the value addition capabilities of companies. While EVA of a company is a historical figure based on the efficiency with which it used the resources at its disposal in a particular year (i.e. wealth created in a year), its MVA is the market assessment of its ability to create wealth in the future (Stewart, 2000). Besides these two measures, a number of researchers in the finance literature like Kakani (2001), Boasson and Boasson. (2005), Rashid (2008) argued Tobin s Q Ratio, to be the most appropriate measure of 169

3 value creation. Hence, in the present study, three surrogates of shareholder value creation i.e. EVA, MVA and Tobin s Q have been selected and studied as dependent variables. Among these, EVA has been used as the accounting-based dimension whereas MVA and Tobin s Q have been taken as the market-based dimensions of shareholder value. A brief explanation of each of the selected dependent variable is given below: Economic Value Added: EVA has gained wide acceptance, in both the investment community and corporate boardrooms, as a measure that links managerial decisions to shareholder value creation (Ramezani, 2002). Stewart (2000) defined EVA to be an estimate of true economic profitability and the performance measure that is most directly linked to the creation of shareholder value overtime. Theoretically, EVA is the net operating profit after tax of a business, minus a charge for the capital employed. While computing EVA, the capital is charged at a rate that compensates investors for bearing the firm s explicit business risk. By subtracting the charge for capital employed i.e. cost of capital, EVA automatically sets aside a return, which is sufficient to recover the value of the capital that has been, or will be invested. For this reason, it automatically accounts for any premium over (shareholder value creation), or discount under (shareholder value dilution), the capital invested. In this study, EVA has been taken as a dependent variable representing the shareholder value created or eroded by a company. As EVA does not account for the growth opportunities inherent in the company s investment decisions, managers need to focus on MVA too. MVA overcomes this criticism of EVA by measuring the difference between what investors have put in and what they expect to take out (Ramezani, 2002). Market Value Added: MVA is a significant overall summary assessment of corporate performance, one that shows how successful a company has been in allocating, managing and redeploying scarce resources to maximize the net present value of the enterprise and the wealth of its shareholder (Stewart, 1994). The financial advisory also argue that the real measure of a company s long term ability to add shareholder value is MVA as it depicts the confidence of the capital market on the company s performance (Dubey, 2000). MVA being the absolute measure of shareholder value creation is obtained as the difference between the company s market value of invested capital and its economic capital. A positive MVA indicates that the company is building value for its shareholders 170

4 whereas a negative MVA signals dilution of shareholder value. Therefore, the above discussion leads to the selection of MVA as the dependent variable representing company s shareholder value creation. Tobin s Q Ratio: This ratio was developed by James Tobin of Yale University, Nobel Laureate in Economics, who hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. The Q ratio is calculated as the market value of a firm's assets divided by the replacement value of the firm's assets (Tobin 1969). Baosson and Boasson (2005) explained that if the market value reflects solely the recorded assets of a company, Tobin's Q would be one. If Tobin's Q is greater than one, then the market value is greater than the value of the company's recorded assets. This suggests that the market value reflects some unmeasured or unrecorded assets of the company. On the other hand, if Tobin's Q is less than 1, the market value is less than the recorded value of the assets of the company. This suggests that the market may be undervaluing the company. Due to the data limitations, a substitute measure of Tobin s Q ratio is used for the present study. It is calculated by first adding the market value of equity, book value of preferred stock and book value of debt and then dividing the sum with book value of assets Explanatory Variables and Hypothesis Development Various firm-specific attributes and the rationale of their inclusion as a possible determinant of firm s value creation are discussed below: Age: Sorensen et al. (1999) argued that organizational inertia operating in old firms tend to make them inflexible and unable to appreciate changes in the environment. Newer and smaller firms, as a result, take away market share inspite of disadvantages like lack of capital, brand names and corporate reputation with older firms. Kakani et al. (2002) found that older firms are unable to react quickly to the recessionary phase while the younger companies with their modern management methods are a lot more agile, and open to the opportunities that come with the opening up of the sector that helps them to adapt changing trends and customer preferences. Raman and Dangwal (2003) also identified that the continuous use of outdated management and marketing practices alongwith the obsolete technology used by the older firms are the main causes of their 171

5 lesser growth. On the contrary, Malhotra and Singh (2007) stated that the age of a company may be considered as a crude proxy for both the accumulation of experience as well as reduction in the perceived risks. An older firm may have significant market share due to the long established clientage, customers loyalty and business linkages with various factors of production and distribution. In the present study, age is included as a variable with positive impact; the hypothesis being H 1 : Age of the company has a positive impact on its shareholder value. Size: Size is expected to be an important determinant of firm s performance that positively contributes to its shareholder value. Capital market imperfections give a number of advantages to larger firms in securing finance and enjoying economies of scale in almost all the fields like management, production, marketing and distribution. These advantages help the larger firms to have stronger competitive capabilities, superior access to the organizational resources and increased market power than smaller ones to achieve their goals. Moreover, the economies of scale in product and financing market further assist the larger firms to reduce their cost of production thereby increasing return on capital and hence shareholder value. Boubaker et al. (2008) identified that the impact of size factor on value creation is negative for small sized firms (-36.9%) and positive for large sized firms (16.6%). The phenomenon can be explained by the resource constraints and financing problems of small firms. Kakani et al. (2001) empirically tested that an increase in the size of a firm, apart from increasing its profit margin and its profitability, also reduced its risk. All these factors led to an increase in the firm s shareholder value. Hence the foregoing discussion justifies the acceptance of size as an independent variable in the study having a positive impact on the firm s shareholder value. For the purpose of the study, size has been measured by three broad measures namely assets, sales and market capitalization, each representing a different view of a firm s ability to expand. Therefore following hypothesis has been formulated and tested: H 2 : Size of a company as measured by sales, assets and market capitalization has a positive influence on its shareholder value. Profitability: Profitability of a company has been recognized as a driver of corporate growth and value creation by many researchers. Varaiya, et al. (1987) found that both 172

6 profitability and growth influence shareholder value, but profitability has a greater impact. Kakani, et al. (2001) also found that a higher profit margin implies that the firm enjoys significant market power and hence can reap what economists call producers surplus or rents. Moreover, Glenning et al. (2007) revealed that the most striking differentiating factor of top-quartile companies performance in terms of TSR (Total Shareholder Return) has been their ability to grow revenues strongly. Hence, to gauge the firms efficiency of converting its assets, investments, capital, sales and equity into value for shareholders, the present study uses five measures of profitability i.e. ROTA, ROI, ROCE, Profit Margin and ROE. A higher ratio of these measures reflects firms capability to generate more earnings resulting in a higher spread and improved shareholder value. Hence the following hypothesis can be drawn and studied: H 3 : Firm s profitability has a positive impact on its Shareholder Value. Risk: Pandey (2005) empirically found that Economic Profitability has positive correlation with growth, size and capital intensity whereas it has negative correlation with beta and leverage (two determinants of firm s risk). On the other hand, since market value of a firm is a function of its return; given the level of risk {cited from Fruhan (1979) and quoted in Kakani et al. (2001)}, risk of a firm becomes an important determinant of its valuation and hence of its shareholder value addition. The present study uses both of the parts of firm s risk i.e. systematic risk and unsystematic risk as the expected determinants of its shareholder value addition. Systemetic Risk: Risk that arise on the part of the economy-wide uncertainties and the tendency of individual securities to move together with changes in the market. This part of the risk can not be reduced through diversification and is called as Market risk/systemetic risk. Thus, systematic risk of the firm, as denoted with Beta measures the sensitivity of firm s share price in relation to the market index. Pitman et al. (2006) explains that one outcome of lower volatility is that it leads equity investors to require a lower risk premium. This translates into a lower cost of capital, which in turn improves the conditions for wealth creation. Hence, it can be interpreted that higher the market risk (beta), more will be the shareholders expected returns, resulting in a higher cost of equity and reduced shareholder value. 173

7 Unsystematic Risk: Risk that arises from the uncertainties which are unique to individual securities and which is diversifiable if large number of securities are combined to form well-diversified portfolios is called as unsystematic risk. (Pandey, 1997). In the present study, Leverage has been taken as a proxy of unsystematic risk. It is used to establish a negative relationship between shareholder value and the higher proportion of debt component in the capital structure of Indian companies. Kakani and Kaul (2002) explained that higher leverage or poor solvency position reduces a firm s financial flexibility apart from increasing its financial and bankruptcy risk. It implies that a higher debt component in the capital structure puts extra pressure of fixed interest burden on the firms. Kakani et al. (2001) stated that the capital structure of a firm also affects its governance, to the extent that debt-holders become important stakeholders of a firm with higher leverage. Hence, the positive effects of higher debt financing depend on the ability of debt-holders to monitor the activities of management. In an institutional context, where this does not take place, the negative effects of higher leverage would prevail. Hence, in the present study Beta and Leverage have been taken as the proxies for the firm s systematic and unsystematic risks respectively and the above discussion leads to the formulation of following hypothesis: H 4 : Both Systematic and Unsystematic Risks of a firm are negatively associated with its shareholder value. Efficient Resource Management (ERM): The efficiency, with which a firm manages and utilizes its resources, is another factor affecting the value generation ability of a firm. The impact of ERM on shareholder value of a firm can be judged on the basis of four broad measures namely Assets Turnover Ratio (ATR), Working Capital Turnover Ratio (WTR), Inventory Turnover Ratio (ITR) and Capital Turnover Ratio (CTR). ATR measures the company s ability to generate sales revenue in relation to the size of the asset investment. If the assets don t create a sufficient amount of sales, these are not used effectively and this fact can have unfavorable impact on the amount of operating profitability and on the shareholder value. At the same time, unutilized or underutilized assets increase the requirement of costly financing for additional expenditure on their maintenance and upkeep that again effects the shareholder value adversely. In simple words, higher ATR implies more sales with same level of assets resulting in higher 174

8 profitability and improved shareholder value. Kakani et al. (2001) stated that WTR, a measure of the solvency position of a business group is basically an expression of how much in liquid assets, the firm currently has to build its business, fund its growth, and produce value. Kishore (2002) explains that by optimizing the investment in current assets and by reducing the level of current liabilities, the company can reduce the locking up of funds in working capital thereby, it can improve the return on capital employed in the business and hence its shareholder value. The goal of shareholder s wealth maximization is related to ITR that shows the efficiency with which inventory is managed and how rapidly the inventory is turning into receivables through sales. A low inventory turnover signals the excessive inventory levels than warranted by production and sales activities resulting in un-necessary tie up of funds, reduced profits and increased costs (Pandey, 1997). On the contrary, a high inventory turnover may be due to the replenishments of inventory in too small lots that further results in higher ordering costs and it may also signal that firm carries low levels of inventory that may result in frequent stock outs. But if the higher inventory turnover indicates that stocks are sold more frequently it means lesser amount of money is required to finance the inventory. Hence, ITR influences the liquidity position and operating efficiency of a firm and hence its shareholder value. Further, CTR conveys the firm s efficiency in utilization of capital employed to generate revenues for its shareholders. Overall, the discussion leads to the formulation of the following hypothesis: H 5 : Efficient Resource management of a firm as measured by efficiency ratios (i.e. ATR, WTR, ITR and CTR) has a positive impact on its shareholder value. Liquidity: Pandey (1997) explains that a liquid firm has less risk of insolvency i.e. it hardly experience a cash shortage or stock-outs. However, there is a cost associated with maintaining a sound liquidity position as a considerable amount of firm s funds will be tied up in current assets, and to the extent this investment is idle, the firm s profitability will suffer. Hence the firm s liquidity position involves risk-return implications where a firm either accepts higher risk (of low liquidity) and higher return or accepts lower risk and lower profitability. Pitman et al. (2006) identified that liquidity in the market makes the regulatory authorities able to perform their function of monitoring the firms and can 175

9 improve its value. Based upon the above discussion the study considers liquidity as an important determinant of firm s shareholder value and establishes the following hypothesis: H 6 : Liquidity of a firm positively influences its shareholder value. Marketing Expenditure: Higher expenditure on marketing and advertising helps firms in building their reputation and also acts as an entry deterrent for new entrants in the industry (Pant and Pattanayak, 2007). Such expenditure helps to create awareness regarding products and services offered by the company and helps to build the customer loyalty. Marketing expenses incurred on building brands can also help firms to get over difficult years and protect their market share and sales volume, and also defy industry trends {cited from Mathur et al. (1998) and quoted in Kakani et al. (2001)}. Thus, marketing expenditure can be hypothesized to have a positive influence on the shareholder value. H 7 : Marketing Expenditure of a firm positively influences its shareholder value. Research and Development Expenditure: R & D Expenditure is expected to be a substantial determinant of corporate growth and shareholder value generation. Higher spending in R&D leads to the higher shareholder value which suggests that high R&D firms are innovative and profitable (Pant and Pattanayak, 2007). Glenning and Goth (2007) suggested that companies need to meld innovations and creativity to drive growth and value creation in the long run. A successful R & D initiative allows a firm to go for new product development, improved methods and technological upgradation which leads to a secure market share as well as high economic profitability that ultimately generates more shareholder value. Hence the study perceives the positive impact of Research and Development expenditure on shareholder value creation and formulates the following hypothesis: H 8 : R & D expenditure of a company has a positive impact on its shareholder value. Notations and formulas used for all the variables and the expected relationships of explanatory variables with dependent variable (shareholder value) are presented in table

10 Table 6.1: Description of Variables Affecting the Firm s Shareholder Value Labels Variable Name Notation Description Expected Sign Y Dependent Variables Economic Value Added EVA Net Operating Profit after Taxes- (WACC*Economic Capital) Market Value Added MVA Market Capitalization + Book Value of Debt- Economic Capital Tobin s Q TOBIN (Market Value of Equity + Book Value of Preferred Stock + Book Value of Debt)/(Book Value of Assets) Independent Variables X 1 Age AGE 2007-(Year of Incorporation) + X 2 Size + Sales SALES Net Sales Assets ASSETS Net Assets Market Capitalization MARKETCAP 365 Days Average Market Capitalization X 3 Profitability + Return on Total Assets ROTA (Profit before Interest and Taxes -Provision for Tax/Assets)*100 Return on Capital Employed ROCE (PAT nnrt/average Capital Employed)*100 Return on Investment ROI (PAT/ Net Worth)*100 Return on Equity ROE (PAT-Preference Dividend/Net Worth-Preference Capital)*100 Profit Margin on Sales Profit Margin (Profit before Interest and Taxes/Sales)*100 X 4 Risk - Systematic Risk BETA Covariance (Ri, Rm)/ Variance (Rm) Where, Ri is the Return on Security i and Rm is the market return. Unsystematic Risk (Leverage) DERATIO Total Borrowings/Net Worth X 5 Efficient Resource Management + Asset Turnover Ratio ATR Total Sales/Fixed Assets Working Capital Turnover Ratio WTR Total Sales/(Current Assets- Current Liabilities) Capital Turnover Ratio CTR Total Sales/Capital Employed Inventory Turnover Ratio ITR Net Sales/Average Inventory X 6 Liquidity i.e. Quick Ratio QR Quick Assets/Current Liabilities and Provisions + X 7 Marketing Expenditure MARKETEXP (Marketing Expenditure + Advertising Expenditure)*100/Sales + X 8 Research and Development R & D (Capital R&D Expenditure + Revenue R&D Expenditure)*100/Sales + 177

11 6.5 Empirical Results and Discussion This section presents the results of the Panel Data Least Square Regression Analysis based upon each of the three dimensions of shareholder value creation i.e. EVA, MVA and Tobin s Q. We begin by discussing the results of regression analysis with EVA as the dependent variable and then move on to regressions with MVA and Tobin s Q as the dependent variables respectively. In each case, explanatory variables representing various corporate attributes (as explained in section 6.4.2) remain same. As discussed earlier, the study uses three separate measures of firm size (i.e. Sales, Assets and Market Capitalization), five measures of firm s profitability (i.e. ROTA, ROI, ROCE, Profit Margin, and ROE), four variables representing firm s resource management (i.e. ATR, WTR, ITR and CTR) and two measures of risk (i.e. Beta and Leverage). Hence, Pearson s correlation matrix was at first formed that evidenced high degrees of correlation among various independent variables selected to represent one corporate attribute i.e. among all the five profitability measures as well as among three size surrogates etc., causing the problem of multicollinearity. Hence, only one surrogate of each independent corporate attribute has been taken in one model resulting in the 60 regression models (with different combinations) for each dimension of shareholder value creation. In the present study, the results of the best model in each case i.e. EVA, MVA and Tobin s Q are presented and discussed EVA Dimension: Table 6.2 reports the result of Panel data regression analysis between various firm-specific attributes and Economic Value Added (the accountingbased surrogate of shareholder value creation) of selected Indian companies. AGE of the firm, as an explanatory variable has revealed a highly significant and negative relation with EVA. It indicates that evaluated on the ground of shareholder value creation, younger companies have performed better than the older ones. Size (as measured with MARKETCAP) and MARKETEXP of a company depict a positive association with its shareholder value. It indicates that an increase in the size probably enhances a firm s financial clout and its market power, while an increase in the marketing spend by a firm probably improves its market share apart from increasing the size of the product market itself, helping the firm to increase its sales, margins and shareholder value (Kakani et al, 2001). 178

12 Table 6.2: Results of the Multivariate Panel Data Regression Analysis with Economic Value Added (EVA) as Dependent Variable Variable Coefficient Std. Error t-statistic Prob. C AGE MARKETCAP ROCE BETA DER MARKETEXP RD Effects Specification Cross-section fixed (dummy variables) R-squared Adjusted R-squared F-statistic Prob (F-statistic) Further, profitability in terms of ROCE is found to have a significant (at 1% level) and positive impact on shareholder value creation. On the contrary, BETA shows a negative association (at 10% level of significance) with EVA that signals the inverse relationship between systematic risk of a company and its shareholder value which is in line with the hypothesized relationship. These results confirm that companies with higher profitability and lower market risk add more towards their shareholder value. On the other hand, DER and RD are not found to be the significant determinants of shareholder value. From accounting perspective, an insignificant association between RD and EVA may imply that in Indian companies the amount spent on R&D activities captures such a small share of sales revenue that doesn t contribute to the shareholder wealth substantially. In addition, two corporate attributes namely Efficient Resource Management and Liquidity were found to have an insignificant and negligent correlation with the dependent variable (EVA). Hence, these were eliminated from the regression model. Thus, considering EVA as dependent variable, five corporate attributes i.e. AGE, Size (MARKETCAP), Profitability (ROCE), Risk (BETA) and MARKETEXP turn out to be statistically significant explanatory variables that collectively explain about 67% (R 2 ) of 179

13 the variation in shareholder value creation in selected Indian companies. This model provides Adjusted R 2 of 63.73% with statistically significant F-Statistic at (p<.01). Thus, this model can be considered as statistically fit and proves the relationship between corporate attributes of the firms and their Economic Value Added MVA Dimension: Table 6.3 presents the results of Panel data regression analysis with Market Value Added (the market-based proxy for shareholder value creation) as the dependent variable. Table 6.3: Results of the Multivariate Panel Data Regression Analysis with Market Value Added (MVA) as Dependent Variable Variable Coefficient Std. Error t-statistic Prob. C SALES ROCE DER ATR MARKETEXP QR RD Effects Specification Cross-section fixed (dummy variables) Period fixed (dummy variables) R-squared Adjusted R-squared F-statistic Prob (F-statistic) The results clearly depict that among all the selected independent variables representing various corporate attributes, as much as five variables have shown the significant and positive association with MVA namely, Size (measured in terms of SALES), Profitability (as ROCE), MARKETEXP, QR and RD. It indicates that larger firms which spend heavily on the marketing and advertising of their products and services and those with higher expenditure on R&D account, contribute positively towards their sales turnover and hence add more to the shareholder value. Similarly, higher SALES and higher ROCE also assist the firms in making additions in the companies shareholder value. The positive and significant slope coefficient of QR implies that companies with better 180

14 liquidity position are excellently monitored by Regulatory Bodies, Financial Institutions and Stock markets resulting in building the investor s confidence that further leads to pick up the company s market value and shareholder wealth. Further, two variables i.e. AGE and BETA did not evidence a significant correlation with MVA, and thus had to be eliminated for the regression analysis with MVA as dependent variable. Using MVA as the market-based proxy for shareholder value creation, this regression model provides the Adjusted R 2 of 76.77%. F-Statistic of this model is also large (34.872) and significant (p<0.01). Firm-specific corporate attributes namely, Size in terms of SALES (significant at 1%), Profitability as ROCE (significant at 1%), MARKETEXP (significant at 1%), Liquidity as QR (significant at 1%) and RD (significant at 1%) collectively explain as much as 79.04% (R 2 ) of the variation in shareholder value of a company. However, the study finds insignificant association of other explanatory variables like Age, Risk and Efficiency in Resource Management with shareholder value creation when the later is proxied by MVA Tobin s Q Dimension: The results of Panel data regression analysis, taking Tobin s Q as the dependent variable are presented in table 6.4. Consistent with the previously established relationship, Profitability (in terms of ROCE) once again establishes a significant and positive effect on shareholder value creation. Size as measured with MARKETCAP too, depicts a positive association with its shareholder value. A positive association between QR and TOBIN indicates the competency of the sample companies to meet all present and potential demands on cash that minimizes cost and maximizes value of the firms. Moreover, the positive and significant slope coefficient of QR also signifies that companies with better liquidity position are excellently monitored by Regulatory Bodies, Financial Institutions and Stock markets resulting in building the investor s confidence that further leads to pick up the company s market value and shareholder wealth. Except the three explanatory variables namely ROCE, MARKETCAP and QR, all other variables showed insignificant association with TOBIN. AGE of the firm, however again revealed the negligent and insignificant correlation with dependent variable. Thus, it was eliminated from the regression model with Tobin s Q as dependent variable. 181

15 Table 6.4: Results of the Multivariate Panel Data Regression Analysis with Tobin s Q (TQ) as Dependent Variable Variable Coefficient Std. Error t-statistic Prob. C MARKETCAP ROCE BETA DER CTR QR MARKETEXP RD Effects Specification Cross-section fixed (dummy variables) Period fixed (dummy variables) R-squared Adjusted R-squared F-statistic Prob (F-statistic) Analyzing the impact of various firm-specific attributes on the second market based dimension of shareholder value i.e. Tobin s Q, the results provide adjusted R 2 at 60.46%. The F statistics at of the model is also found to be significant as p<.01. In this model, the value of R 2 confirms that independent variables namely Profitability as ROCE, Size as MARKETCAP and Liquidity (QR) collectively explain about 64.35% of the variation in shareholder value of the sample companies. It means that the variation in the dependent variable, to the extent of 35.65% remains unexplained due to the additional attributes which are not captured in the regression model Testing the Hypothesis The study attempts to identify the impact of various corporate attributes on the shareholder value of the sample companies. Evaluating shareholder value on the basis of accounting based as well as market based dimension, the study reveals the divergence between the results. It shows that the set of independent variables explain about 66.93% of the variation in the accounting-based surrogate EVA whereas these account for 79.04% variation in the firm s shareholder value when it is measured on the basis of 182

16 market-based surrogate, MVA and 64.35% variation with Tobin s Q as dependent variable. Kakani et al. (2001) stated that to the extent that the effect of the predictor variables on market-based performance measures and accounting-based performance measures differs, it can be attributed to speculative forces that influence asset pricing in capital markets. The present study reveals that the firm characteristics like Age, Size, Profitability, Risk, Liquidity, Market Expenditure and R&D Expenditure depict a significant influence on the shareholder value although their composition differs. For instance, five variables i.e. AGE (-), Size as MARKETCAP (+), ROCE (+), BETA (-), and MARKETEXP (+) are significant with respect to accounting-based dimension EVA, whereas Size as SALES, ROCE (+), Liquidity (QR) (+), MARKETEXP (+) and R&D Expenditure (RD) (+) depict significant association in case of market-based dimension MVA. Similarly, Size as MARKETCAP (+), ROCE (+), and Liquidity (QR) (+) are found to be the significant predictors of Shareholder value as far as Tobin s Q is considered as dependent variable. The results clearly show that all the hypothesis except H 1, H 4 and H 5 evidence the preestablished relationships and thus accepted. On the contrary, an attempt has been made to identify the probable reasons that have led to divergence between the hypothesized and actual relationships with respect to other explanatory variables. AGE (H 1 ), the first chosen firm attribute, is found to have a negative impact on the shareholder value. It implies that comparatively younger companies have performed better than the older ones. Moreover, this variable (AGE) did not find any correlation with both of the market based dimensions which implies that being the oldest or the youngest company around is not perceived to have a considerable impact on the shareholders interests by the Indian stock markets. Further, Risk as measured by leverage (H 4 ) has not been found to be a significant predictor of a firm s shareholder value as opposed to the expected negative relationship. However in case of EVA as dependent variable it is found to be significant at only around 10% level of significance and reports positive slope coefficient. That means the results of the study are in line with the Net Income Approach of capital structure theory given by David Durand. It states that with increased use of debt, the weighted average cost of capital declines and the total value of the firm rises. Moreover, such positive association also witness that in Indian companies, institutional investors and 183

17 debt holders perform an adequate and effective monitoring role. Pandey (2005) too, identified the similar relationship between leverage and shareholder value implying that higher financial risk increases shareholder value. At last, Efficiency in Resource Management (H 5 ) is also identified as an insignificant explanatory variable in both the accounting as well as market based dimensions of shareholder value. Figure 6.1 summarizes the dimensions of shareholder value and their relationship with firm characteristics. Figure 6.1: Dimensions of Shareholder Value and their Relationships with Firm- Characteristics Shareholder Value Maximization Accounting-based Dimension Market-based Dimensions Economic Value Added Market Value Added Age (-) Size as MARKETCAP (+) Profitability as ROCE (+) Beta (-) Marketing Expenditure (+) Size as SALES (+) Profitability as ROCE (+) Liquidity (+) Marketing Expenditure (+) R & D Expenses (+) Tobin s Q Size as MARKETCAP (+) Profitability as ROCE (+) Liquidity (+) Worth to be noticed that the significant explanatory variables affecting market based dimensions of shareholder value are almost similar. Moreover two corporate attributes i.e. Size and Profitability are found to be the highly significant predictor of shareholder value in all the three models. 184

18 6.7. Conclusion The study provides a fact base that objectively examines the firm specific factors, among which the corporate decision makers can navigate their key choices and trade-offs to create superior shareholder value. The analysis shows that investors tend to reward those companies which have higher profitability, lower market risk, high leverage, more liquidity, higher marketing/r&d expenditures and the robust market capitalization. Thus, Indian managers need to be aware of the investors expectations for high profitability, lower risk, huge size and more liquidity as these are embedded in today s market valuations. The senior executives and decision makers should also strive to push their management teams to think creatively and aggressively about upcoming opportunities in such a way that at the end of the day, all decisions, including decisions about growth opportunities must drive to the long term shareholder value creation. 185