Showing papers in "Indian Journal of Finance in 2015"

Financial Inclusion and its Determinants: A Study of Bangladesh

Abstract: Despite the present focus of policies devoted to promote financial inclusion in Bangladesh, the issue of its comprehensive and robust measurement, which can be used to assess the extent of financial inclusion across the country is outstanding. This study attempted to fill this gap first, by proposing a multi-dimensional index and then identifying the determinants of financial inclusion. Following similar methodology used to construct the Human Development Index (HDI), data on several dimensions of financial inclusion were used to develop an index lying between 0 and 1. The Euclidean distance formula was applied to extract the normalized indicators. The findings of the study showed that only one district in Bangladesh, that is, Dhaka achieved high stated financial inclusion, and five districts achieved medium stated financial inclusion during 2009-2013, while very low financial inclusion was observed across the remaining 58 districts out of 64 districts of Bangladesh. The empirical findings also showed that 47 districts out of 64 witnessed an improvement in the IFI score of financial inclusion. However, the extent of progress of financial inclusion in these 47 districts was found to be insignificant to change their status from low financial inclusion to medium or high financial inclusion. Among the socio-geographic variables, rural population, household size, and literacy rate; among the infrastructure variables, paved road networks, Internet ; and among the banking variables, deposit penetration were found to be the significant determinants of financial inclusion. One of the major contributions of this study is that it will invoke the governments and policy makers across the world to develop a financial inclusion index for their respective countries, and thereby undertake such policies to promote financial inclusion.

Financial Services, Economic Growth, and Well-Being: A Four-Pronged Study

Abstract: A four-pronged approach to dealing with social science phenomenon is outlined in the present paper. This methodology is applied to financial services, economic growth, and well - being. The four prongs are like the four directions for an army general looking for victory. Just like the four directions, we need to be aware that there is a degree of interconnectedness in the following four prongs. Uncertainty principle of the social sciences; Responsibilities of fiscal janitors; Need for smaller organizations; Redirecting growth that generates garbage. The importance of gaining a more profound comprehension of welfare and delineating its components into those that result from an increase in goods and services, and hence can be attributed to economic growth and into those that are not related to economic growth, but lead to a better quality of life were highlighted in the paper. The reasoning being that economic growth alone is an inadequate indicator of well-being. Hand in hand with a better understanding of the characteristics of welfare comes the need to consider the metrics we currently have that gauge economic growth and supplement those with measures that capture well-being more holistically.

Impact of Corporate Governance Practices on Working Capital Management Efficiency: A Structural Equation Modelling Approach

Abstract: Working capital management and corporate governance are two important issues of overall firm management. The purpose of this study was to explore the impact of corporate governance practices on working capital management (WCM) efficiency of firms in a growing economy like India. We used data from 127 large Indian manufacturing sector firms and employed structural equation modelling to study this relationship. The period of the study is from 2004-2013 (10 years). We found that corporate governance indicators like board size, number of independent directors in a board, and percentage of independent members in an audit committee do significantly affect the efficiency of working capital management. We also found that an increase in independence of the board and audit committee compels the management to be conservative in managing short term capital, which in turn negatively affects WCM efficiency. It was observed that an increase in board size weakens control and allows the management to follow aggressive WCM strategies. The results also revealed that the size and independence of a board has more effect on WCM efficiency than the independence of the audit committee. The results of the study will help the practitioners, investors, and analysts to better understand the relation between effective corporate governance and short term funds management and enable them to take better and informed decisions.

A Study of Investment Awareness and Patterns of Savings and Investments by Rural Investors

Abstract: The nature of financial markets has changed drastically. Investing money has become a very complex task because of the huge number of savings and investment companies and products offered by them, terms and conditions of investments, and prevalent complex rules and regulations. Most of the investors, particularly rural investors, are found to be unaware about investment avenues and rules and regulations. In spite of remarkable growth of our economy and increasing income levels of people, the pace of savings mobilization is lower in India. Rural savings are not mobilized and invested properly. Investment is an economic activity which creates capital required for various sectors of the economy. So, every earning person should be motivated to save and invest his/her money. The study attempted to find out the awareness levels of rural investors about various investment avenues, their preferences, and considerations for investing money. A sample of 300 respondents was selected from four villages from Sillod block of Aurangabad district, Maharashtra. The major focus of the study was on investigating whether there was a difference between investment awareness levels and educational qualifications of male and female rural investors. The study disclosed that there was no significant difference in awareness levels of rural male and female investors and their educational qualifications. The investment preference order of the respondents indicated that they wished to park their investments in 'safe' options only. Bank deposits, gold and jewelry, real estate were popular investment avenues for a majority of the investors.

Remittances, Financial Sector Development, Efficiency, and Growth in Africa

Abstract: The study modelled the relationship between remittances and economic growth and its interaction with financial development and efficiency. Using dataset for 44 countries in Africa for the period from 1998 to 2012, the results obtained showed that remittances are positively related to growth. Remittances impact more in recipients' economies with a less-developed financial sector. Quantity-based indicators of financial development impacted mildly on economic growth as compared to the quality-based indicators. The interaction between remittances and the quality-based indicators was more important to growth than the interaction between remittances and quantity based indicators. These results are robust to the threshold estimation. The study recommended the design of policies that would facilitate improvements in the quality-based indicators, a situation that has previously been ignored.

The Impact of the Global Crisis of 2008-09 on the Relationship Between Stock Markets and Oil Prices in the BRIC Countries

Abstract: This paper examined the relationship between the equity indices in the BRIC economies and oil prices for the period from September 22, 1997 to November 29, 2013. We focused on various sub-periods to obtain statistically robust and economically solid relationships and to address cross-sectional dependence among stock market indices and oil prices in panel data techniques. For this purpose, we developed a test framework that made use, in a sequential order, of the second generation panel unit root test, the panel cointegration technique accounting for multiple structural breaks, the panel-Granger causality test, and the panel dynamic ordinary least square estimations to analyze the possible interactions. The results showed that there is a long-run positive relationship between the stock market indices and the oil prices only after fall 2008 in the panel framework. We analyzed the related period for each country in detail, and found that oil prices have positive effects on the equity indices in Russia, China, and India. Our findings also indicated that there is a causality relationship that runs from the oil prices to the stock markets' indices in China and India, and there is a pair-wise causality between the equity indices and the oil prices in the Russian economy.

Foreign Portfolio Investment and Stock Market Volatility in India

Abstract: Although, it is a generally held belief that foreign portfolio flows benefit the economies of recipient countries, policy-makers worldwide have perennial discomfort about such investments. Such portfolio flows are widely termed as "hot money," given its notorious volatility compared to other forms of capital flows as foreign investors make sudden and concerted withdrawals of portfolio investments at the faintest smell of trouble in the host country, thereby accelerating and magnifying the inconspicuous problem of the downfall in stock prices, often leading to disastrous consequences to the host economy. The discussion is often emphasized by the financial press due to the visible evidence of their contemporaneous nature at times of economic crisis. Relationship between foreign institutional ownership and volatility is largely inconclusive. Although the literature in business newspapers and also some previous empirical studies suggest that institutions tend to destabilize prices by increasing turnover levels, there are some good reasons to believe that higher levels of institutional ownership could be negatively related to volatility. In this present study, using firm-level Indian panel data from 2003 to 2013, we analyzed the association between stock's return volatility and their FII holdings in a VAR framework. The results showed that no significant causal relationship exists between the two variables.

An Empirical Investigation of Mispricing in Stock Futures at the National Stock Exchange

Abstract: This paper is an attempt to study the mispricing in stock futures of India. The cost of carry model was operationalized in the present study. Any deviation from the theoretical price so arrived at connotes mispricing. In-depth analysis was conducted with respect to the frequency and magnitude of mispricing. Furthermore, the results were charted across variables like maturity and with respect to basis. Non parametric tests were applied to establish statistical significance of the findings. The findings indicate that there existed significant mispricing in the stock futures studied. Most of the stock futures contracts were underpriced. These mispricing signals seemed to be largely unutilized by the arbitrageurs due to short selling restrictions at Indian bourses. A clear relationship was observed between basis and mispricing as well as maturity and mispricing. The implications of the findings can be manifold for all the participants in the derivatives market. The paper concluded with limitations of the study and directions for future research.

An Evaluation of the Non Performing Assets of Public and Private Sector Banks Under the SHG Bank Linkage Programme

Abstract: Banking institutions play a significant role in the economic development of a country. There are certain issues of concern that affect their performance and efficiency. One of the major issues is the credit risk involved in the banking sector. According to the Narasimhan Committee, non performing assets (NPAs) are considered as one of the important indicators of profitability and efficiency of any bank. Lesser NPAs indicate a better position of a bank in terms of solvency. More NPAs lead to less profit because of non repayment of interest and principal amount of loan by the creditors, thereby effecting the overall profitability of a bank. Under the Self Help Group (SHG) Bank Linkage Programme (SBLP), the self help groups are linked to a bank where these groups are provided financial services for the benefits of their members. Credit disbursed to a SHG under this scheme is without collaterals. The credit disbursed under this scheme increases the risk for the banks. The main purpose of this study was to compare the public and private sector commercial banks on the basis of NPAs under the SHG Bank Linkage Programme. This paper also tried to study the region wise differences in the amount of NPAs of the public sector banks.

An Empirical Evidence of Dynamic Interaction between Institutional Fund Flows and Stock Market Returns in India

Abstract: This study examined the relationship between institutional investment flow and stock returns using daily data over the period of January 1, 2002 to July 31, 2012. The analysis was conducted using two and three factors vector autoregression (VAR) frameworks, in which we considered investment flow of two sets of institutional investors, that is, foreign institutional investors (FIIs) and domestic institutional investors (DIIs) proxied by mutual funds, separately as well as jointly, to form the endogenous part in VAR. The analysis for each institutional investor group revealed that FIIs flow did not have any significant impact on market returns, but the DIIs investment flow did have a significant impact. We also found that the fund flow from both the investor groups was significantly affected by their own lags and lagged stock returns, implying that they followed their own past strategy as well as the recent market behaviour, albeit their trading strategy differed. Considering these two institutional investor groups jointly, we found that the net flow of FIIs and DIIs significantly influenced the Indian stock market even after controlling for market fundamentals. Furthermore, we found a feedback relationship between the institutional investment flow and stock market returns. Overall, it was found that the institutional investment collectively impacted the stock market returns.

A Test of Alternative Value-at-Risk Models During Volatile Periods

Abstract: This paper compared the performance of alternative models for estimating Value at Risk (VaR) of four different currencies against the Indian rupee. I examined whether incorporating a volatility estimate capturing the ARCH effects in the normal linear VaR model yielded a better estimate of market risk than the traditional models based on historical simulation and historical moving average volatility. I tested the effectiveness of different VaR models during the volatile period of June-September 2013 and found that VaR models based on an estimate of time-varying volatility performed better than traditional models during turbulent times.

Factors Affecting NPAs of Scheduled Commercial Banks : An Empirical Study Based in Punjab

Abstract: The financial sector is always the key sector for the overall development of any country, and the banking sector is the primary sector amongst all. So, a strong banking sector is very important for the growth of the economy. This sector witnessed a lot of changes in our country after the 1991 economic reforms - popularly known as the era of "LPG," that is, liberalization, privatization,&globalization. The reforms focused on branch expansion, granting credit to the weaker sections like agriculture, SSI, education loans, housing, and so forth. However, in recent times, the banks have become very cautious in extending loans due to mounting non-performing assets (NPAs) and nowadays, managing NPAs is one of the major concerns for the banks as NPAs reflect the performance of the banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks, and also erode the value of the asset. The NPA growth involves the necessity of provisions, which reduce the overall profits and shareholders' value. The present paper explored the primary reasons for the growth of NPAs in scheduled commercial banks of Punjab and also suggested the measures for controlling the same.

Syndication of VCPE Investments: Evidence from the Indian Infrastructure Sector

Abstract: In this paper, I examined the syndication of VCPE investments in the Indian infrastructure sector. Using a sample of 501 deals from 160 VCPE funds that happened during 2004 to 2013, the findings indicated that syndication was more pronounced when VCPE funds faced higher risk, and requirement of financial and human capital was larger. This study strongly supported the capital motive of syndication because the total size of investment was significantly higher in syndicated investments than in stand-alone investments. Moreover, I found that higher experienced VCPE funds were more open to syndication. Regression analysis of VCPE syndication indicated that due to less acquaintance with the Indian infrastructure sector and business environment, foreign VCPE investors faced higher risks and ,therefore, were more inclined to involve other VCPE funds to share knowledge base resources.

Is Equity Market Timing the Sole Criteria for Capital Structure Decisions? An Insight from Indian Firms

Abstract: Work done on capital structure mainly focuses on developed economies and only few studies have been conducted for developing economies, especially for India. The present study is the first one which explores the validity of equity market timing for the Indian market. The paper tried to overcome the limitations of previous studies by capturing the individual year effect and by categorizing the firms into three sectors of the economyprimary, secondary, and tertiary. The present study broke the myth about the capital structure decisions, in which it is believed that market timing plays a dominant role, while all other variables are not considered as important as market timing. The period of the study ranges from the year 1992-2011 and the findings revealed that Indian firms have started relying more on their internal firm level characteristics like profitability rather than on market timing for their capital structure decisions. The results were similar when the firms were classified into three sectors, even though the effect of equity market timing was more pronounced for secondary sector firms as compared to the primary and tertiary sector firms. Therefore, the decision-makers should focus on strengthening the firm level characteristics (like profitability) rather than relying solely on equity market timing.

Impact of Foreign Institutional Investments on Stock Market Volatility in India

Abstract: India is being viewed as a potential opportunity by investors, with the economy having the capacity to grow tremendously. Buoyed by exceptional support from the country's government, the FII sector in India looks set to prosper, and the outlook looks extremely promising. In this paper, an attempt was made to study the volatility patterns in Indian markets through properties such as volatility clustering, leverage effect. This paper tried to examine FII flows in Indian securities market and assessed the impact of foreign institutional investment on Indian stock market volatility. Effect of news in the first moment was modeled with the help of ARCH-GARCH process and the change over 24 hours (from a closing rate to a closing rate) was measured for a period from 2004-2014. Our analysis revealed the persistence of volatility and confirmed the leverage effect in Indian securities market. We observed that FIIs contributed significantly to the Indian stock market volatility. The coefficient of gross purchase was significant, suggesting that a greater volatility in gross purchase by FIIs could have greater implications for the volatility of stock indices during 2004-2014 in comparison to gross sales by FIIs.

Does the Pre-Open Auction Market Improve Efficiency of Price Discovery in Stock Markets? Evidence from India

Abstract: The paper analyzed the impact of opening call auction on the efficiency of price discovery at the National Stock Exchange (NSE), India by studying the returns and volatility behavior of one benchmark index (NSE's Nifty) and 10 Nifty component companies selected on random. The paper used the closing prices for the period 3 years before and 3 years after the introduction of the call auction market in 2010. Descriptive statistics, one-way ANOVA, augmented Dickey-Fuller unit-root Test, and ARCH-GARCH type methodology was employed for the analysis. The paper found no significant difference in the returns during the two periods, though a reduction in volatility was observed. The introduction of the pre-open auction market resulted in an improvement in the efficiency of price discovery of various stocks. The findings of the paper offer valuable inputs for stock market regulators as well as investors.

Working Capital Management in Modern Rice Milling Firms at Kangayam, Tamil Nadu

Abstract: This study was conducted to evaluate the working capital management practices adopted by the rice milling firms and to analyze its impact on profitability. Primary data on working capital management practices were collected by using an interview schedule, and the financial data were obtained from the records maintained by the firms. The study involved assessment of the working capital management practices adopted by the rice milling firms in terms of raw material ordering system and frequencies of overstocking of inventory. Working capital management efficiency indices, namely performance index, utilization index, and efficiency index were computed from the financial data, and it was found that the efficiency index was more than one during the study period, indicating an efficient working capital management by the firms. The average CCC of the firms during the study period was 3 months, and DPO had a significant and positive relationship with profitability of the firms.

The Indian Mutual Fund Industry: From Inception to Advancement

Abstract: Inception of the Indian mutual fund industry was a consequence of progressive liberalization that brought about dramatic changes in the Indian financial system. Liberalization of economic policies caused rapid growth of the capital market, money market, and financial services industry. The Indian mutual fund industry is one of the major results of financial novelty in the Indian context. However, its popularity as an investment option is still debatable. The study was concerned with the journey of the Indian mutual fund industry since its beginning in India. To serve the purpose, the study focused on the following areas : historical perspectives of the Indian mutual fund segment, growth aspect of the mutual fund industry, and the last section highlighted major challenges, issues, and growth prospects of the Indian mutual fund industry.

Modelling Dynamic Volatility Spillovers from the U.S. to the BRIC Countries' Stock Markets During the Subprime Crisis

Abstract: The term 'BRIC' is a collection of Brazil, Russia, India, and China: the most promising emerging markets. The global investors at the time of making investments and building portfolios across different countries should consider the interlinkages that exist between the countries or the assets concerned. The interlinkages make the stock markets in different countries to co-move in the short as well as the long run, thereby leading to spillover of the returns and volatility. The present study attempted to model the dynamic volatility spillover from the U.S. market to the BRIC (Brazil, Russia, India, and China) countries' stock markets during the subprime crisis by employing the ARMA E-GARCH (1,1) model. The results from the E-GARCH (1,1) model supported the spillover of the U.S. volatility to the Brazilian market only. The study revealed that the volatility in the U.S. market did not have a direct impact on the Russian, Indian, and Chinese stock markets.

Microfinance in Eastern India: The Role Played by Regional Rural Banks

Abstract: The present paper studied the microfinance status of the regional rural banks of Eastern India, which included the states of Bihar, Jharkhand, Odisha, and West Bengal for 3 years. The study was based on secondary data. To study made a comparative analysis with respect to the number of self-help groups, savings amount of the SHGs, total loan disbursed by SHGs, outstanding loan and NPAs of the SHGs for SHG scheme, SHG under SGSY scheme, and WSHG scheme. Lastly, the study also made an attempt to analyze and interpret the reasons for the differences.

Effectiveness of Tridiagonal Path Dependent Option Valuation in Weak Derivative Market Environment

Abstract: Accurate option price path is needed for risk management and for financial reporting as the accounting standards insist on mark to market value for derivative products. The binary models - Black Scholes model and Longstaff methods provide an insight on option pricing, but they are seldom validated with real data. Most of the research studies demonstrate the validity through algebra or by solving partial differential equations with strong market data. As these computations are tedious, and they are rarely applied in weak and incomplete markets. In this paper, we tested the actual values of options of Tata Consultancy Services whose shares and options are actively traded on the NSE, and applied the Crank Nicolson central difference method for estimating the path of the option pricing with five exercise prices, two out of money, at the money, and two in the money contracts of call and put options at three volatilities. The actual option values were compared with the forecasted option values and the errors were estimated. The plots of actual option values and the forecasted values produced by the central difference method converged excellently, producing minimum sums of squared error. Even in the weak and incomplete markets, the Crank Nicolson method worked well in producing the price path of options. This algorithm will be useful for hedging decisions and also for accurate forecasting and accounting reporting.

Theoretical Underpinnings of the Determinants of Firm Performance: A Literature Review

Abstract: Literature survey on the determinants of firm performance indicates that earlier studies offered no consensus over the subject to confirm the factors and direction of these factors which determine firm performance. We maintained that the results for firm performance at an aggregate level are not valid for the firms classified based on industries. We also argued that firms cannot increase their performance indefinitely with increase in their sizes. After a certain point, firm performance decreases with the increase in firm size. Furthermore, in view of the recent economic reforms, it is essential to evaluate the role of business groups in India.