Corporate I|nance ract|ces |n Ind|a

A Survey
resenLed 8y
8ohlL Sharma 2010M8A33
Sandeep Slngh 2010M8A42
nLroducLlon
W We have Laken a research arLlcle publlshed ln Lhe SouLh
Aslan !ournal of ManagemenL 8esearch ArLlcle focuses on Lhe
analysls and resoluLlon of managerlal lssues based on
analyLlcal and emplrlcal sLudles relaLed Lo Lhe corporaLe
flnance pracLlces followed ln ndla L ls belleved LhaL Lhe
flndlngs of Lhls sLudy ln Lhe conLexL of ndla wlll be of use Lo
academla and pracLlLloners ln learnlng how corporaLe ndla
operaLes developlng new Lheorles and ldenLlfylng areas
where flnance Lheory ls noL lmplemenLed 1he sLudy ls done
Lo flnd ouL Lhe corporaLe flnance pracLlces vlsavls caplLal
budgeLlng declslons cosL of caplLal caplLal sLrucLure and
dlvldend pollcy declslons
lLeraLure
W 1he besLknown fleld sLudles abouL Lhe
pracLlces of corporaLe flnance are lnLners
(1936) paLhbreaklng analysls of dlvldend
pollcy and
W Craham and Parveys (2001) sLudy on caplLal
budgeLlng cosL of caplLal and caplLal
sLrucLure
ML1PCuCCC?
W 8LSLA8CP uLSCn
A quesLlonnalre was developed based on a comprehenslve
revlew of Lhe exlsLlng llLeraLure 1he sLudy surveys a large
crosssecLlon of 474 prlvaLe secLor and 31 publlc secLor Lop
flrms of corporaLe ndla based on markeL caplLallzaLlon 1he
survey asked Lhe ClCs Lo respond Lo mosL
of Lhe quesLlons on caplLal budgeLlng cosL of caplLal
and caplLal sLrucLure on Lhe lkerL scale of 0 Lo 3
(where 0 means noL used 1 means unlmporLanL
and 3 means very lmporLanL)
8esponse
W n all 81 Chlef llnanclal Cfflcers (ClCs) from a
crosssecLlon of Lhe flrms responded Lo Lhe survey wlLh
a response raLe of 1343 per cenL
W 1he flnanclal sLaLlsLlcs of Lhe respondenL companles
were collecLed from secondary sources 1he daLa on
sales exporL sales asseLs longLerm debL Lo LoLal
funds raLlo prlceearnlng raLlo and lndusLry classlflcaLlon
of respondenL companles were Laken from Lhe lkl5 8ook
Sample
Ana|ys|s and kesu|ts
1 CaplLal 8udgeLlng racLlces
W 1he flrms use uCl meLhodology for caplLal budgeLlng declslons Loday
more Lhan ln Lhe prevlous Llmes
W MosL respondenLs selecL 88 and nv as Lhelr mosL frequenLly used
caplLal budgeLlng Lechnlques
W arge flrms are slgnlflcanLly more llkely Lo use nv Lhan small
Small flrms are more llkely Lo use payback perlod meLhod
W Plgh growLh flrms are more llkely Lo use 88 Lhan Lhe low growLh flrms
whereas low growLh flrms are more llkely dependenL on breakeven
analysls meLhod for caplLal declslon
2 Cost of Cap|ta| ract|ces
1he respondenLs were asked Lo lndlcaLe as Lo whlch meLhod Lhey follow
for compuLaLlon of raLe of dlscounL (mlnlmum accepLable raLe of reLurn)
for caplLal budgeLlng declslons
W nearly 67 per cenL of Lhe respondenLs use slngle dlscounL raLe based on
companys overall WACC Lo evaluaLe Lhe pro[ecLs nearly 22 per cenL of
Lhe respondenLs use mulLlple rlskad[usLed dlscounL raLes dependlng on
Lhe rlsk
characLerlsLlcs of Lhe pro[ecLs 1wenLyflve per cenL of Lhe respondenLs use
cosL of speclflc caplLal used Lo flnance Lhe pro[ecL
W arger flrms are more dependenL on WACC (welghLed average cosL of
caplLal ) whlle dlvldend dlscounL model ls more popular amongsL Lhe small
flrms
Cap|ta| Structure ract|ces
1he respondenLs were asked Lo lndlcaLe Lhelr sources of flnanclng cholces
and rank Lhem ln order of Lhelr relaLlve lmporLance ln Lerms of lLs use 1he
opLlons glven Lo Lhem are reLalned earnlngs debL and equlLy funds
W 1he resulL lndlcaLed LhaL reLalned earnlngs are Lhe mosL favoured source
of flnance amongsL Lhe ClCs nearly 89 percenL of Lhe respondenLs
conslder lL very lmporLanL source of flnance
W 1he low proflLable flrms use dlfferenL forms of debL funds more Lhan Lhe
hlghly proflLable flrms
W LqulLy caplLal as a source of flnance ls noL preferred by Lhe ClC
respondenLs Cnly 169 per cenL of Lhe respondenLs conslder lL as mosL
preferred source of flnance
4ulvldend pracLlces
W 1he resulLs lndlcaLe LhaL 7130 per cenL of Lhe respondenLs
sLrongly agree LhaL Lhelr flrm has a longrun LargeL dlvldend
payouL raLlo
W nearly 20 per cenL of Lhe respondenLs sLrongly agree LhaL
dlvldend changes ln Lhelr organlzaLlon
W Cnly 9 per cenL of Lhe respondenLs agree LhaL Lhe
dlvldend pollcy ls a resldual declslon afLer meeLlng
deslred lnvesLmenL needs
|m|tat|ons of the Study
W WhaLever Lhe respondenLs have sald ls belleved Lo
be Lhelr Lrue response and hence no sLaLlsLlcal LesL
has been performed Lo sLudy nonresponse blas and
Lhe conslsLency of lndlvlduals responses
W AnoLher llmlLaLlon of Lhe survey meLhodology ls LhaL
lL measures bellefs and noL necessarlly acLlons
CCnCDSCn
W 1he analysls reveals LhaL pracLlLloners do use
Lhe baslc corporaLe flnance Lools LhaL Lhe
professlonal lnsLlLuLes and buslness schools
have LaughL for years Lo a greaL exLenL
W 1he sLudy also reveals LhaL Lhe corporaLe
flnance pracLlces vary wlLh flrm slze
keferences
W 8lume Marshall and lrlend rwln (1973) A new ook aL Lhe CAM ootool of
lloooce vol 8 No 1 pp 1933
W 8odle Zvl and MerLon 8oberL C (2000) lloooce New!ersey renLlce Pall
nLernaLlonal nc
W Copeland 1homas A and WesLon lred ! (1983) lloooclol 1beoty ooJ cotpotote
lollcy Mossocbosetts AJJlsooWesley ubllshlng Company
W ueAngelo Parry and 8lce Ldward (1983) AnLlLakeover AmendmenLs and
SLockholders WealLh ootool of lloooclol cooomlcs vol 11 pp J29J60
W lama L l and 8ablak P (1968) ulvldend ollcy An Lmplrlcal Analysls ootool of
Ametlcoo 5totlstlcol Assoclotloo vol 6J pp 11J21161
W 8S (2001) lkl5 8ook 2007 1be lovestots ColJe to loJloo cotpototes Mombol
lovestmeot keseotcb ooJ lofotmotloo Servlces lmlLed
1hank you