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Multiobjective Capital Structure Modeling : An Empirical Investigation of Goal Programming Model Using Accounting Proxies
Yamini Agarwal, K. Chandrashekar Iyer and Surendra S. Yadav Journal of Accounting, Auditing & Finance 2012 27: 359 originally published online 30 June 2011 DOI: 10.1177/0148558X11409156 The online version of this article can be found at: http://jaf.sagepub.com/content/27/3/359
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Multiobjective Capital Structure Modeling: An Empirical Investigation of Goal Programming Model Using Accounting Proxies
Journal of Accounting, Auditing & Finance 27(3) 359385 The Author(s) 2012 Reprints and permission: sagepub.com/journalsPermissions.nav DOI: 10.1177/0148558X11409156 http://jaaf.sagepub.com
Yamini Agarwal1, K. Chandrashekar Iyer1, and Surendra S. Yadav2
Abstract Capital structure decisions (CSDs) have become complicated in this exceeding competitive business environment. Theories and models of 1950s are unable to incorporate the demands faced by the decision maker. New models are needed to incorporate multiple objectives and constraints. Stakeholders are awfully demanding. Practitioners attempt to innovatively build the capital structures to meet the needs of all stakeholders. Off and on balance sheet exposure contributes to financial commitments. In the light of this background, the present study investigates the Indian corporates for their capital structure choices and builds a goal programming model for CSDs. Capital structure practices in India are studied through a sample of top 500 companies classified in 19 industries over 10 year period (1998-2007). Accounting ratios (67) are used to define the multiple considerations before a decision maker. The study has also explored the relationship of leverage ratio with market capitalization and earnings per share (EPS). Using a questionnaire approach, the premise of multiple objectives for CSD is evaluated. Chief financial officers (CFOs) as respondents are investigated for their goals, priorities, motivations, constraints, and capital structure practices. The study has attempted to develop a goal programming (GP) model for providing satisficing solutions to multiple goals simultaneously by minimizing the deviation from the objective function after assuming that the decision maker is an optimist and does not attempt to satisfy all objectives fully. GP model has been developed and illustrated for CSDs through agriculture-based firm having multiple objectives that are proxied using accounting variables. Keywords capital structure decisions, multicriteria decision making, Indian corporates, goal programming model
1 2
Indian Institute of Finance, Delhi, India Indian Institute of Technology, Delhi, India
Corresponding Author: Yamini Agarwal, Indian Institute of Finance, Ashok Vihar, Phase-II, Delhi, India Email:yagarwal@iif.edu
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Journal of Accounting, Auditing & Finance
Theories and principles on capital structure decisions (CSDs) developed in 1950s have lost their relevance in todays globalized interlocked dynamic financial world. In 1950s, Modigliani and Miller (MM) in their path breaking work did not perceive and inculcate the complexities, risk, and uncertainties, which are posed by the emergence of a new financial architecture. The financial architecture has globally integrated electronic finance, privatization, and liberalization in different economies. Sixty years after the work of MM, the size, magnitude, complexity in the number of instruments, and international capital flows (inflows/outflows) have increased multifold (Merton, 1995). The world has now become a global village, and firms have access to global and domestic financial markets and instruments. Challenges before a firm motivates or constraints financial and nonfinancial actions that contribute to costs. Firms are constantly challenged by conflicting goals, agency problems, financial innovations, globalization, competitive pressures, social responsibility measures, environmental consciousness, financial costs, value creation, and many other tangible and intangible issues. Adaptability to change cost structures of a firm form an integral part of CSD-making process. Management perceptions and the economic environment further complicate the CSD process. The priorities of a firm change with the changing times and over its life. Empirical behavioral studies indicate that firms pursue multiple considerations while determining their capital structures. However, no attempt has been made so far to provide for a deeper understanding of such considerations as goals or constraints, their priorities, and the relevance to the Indian Industry. CEOs or a firms decision is based on an overall assessment of the situation which at times apparently appears to lack economic rationale. These considerations and their dimensions are not always quantifiable and readily accessible. A firms ability to choose a specific alternative in its capital structure is a matter of judgment and may remain a mystery for most researchers (Welch, 2004). Such mysteries can be resolved if the firms goals and constraints can be quantitatively and qualitatively developed to arrive at optimizing or satisficing solutions, for any given economic rationalities and realities. Multiobjective framework in todays dynamic corporate environment emerges from the constraints and goals that pose the need for a sensitive CSD model. There is a need for a new model framework that accommodates the changing environment and gives results which satisfy all wants. The role of a decision maker is indispensable for the choice of goals, their priorities, and in the selection of an optimal solution. Decision maker, however, is constrained by his own perceived and existing external environment. This restricts the decision maker to choose a solution that is satisficing for multiobjective criteria as against an optimal solution for a single objective. The study develops a goal programming (GP) model that provides for satisficing solutions to the multiobjective framework in which a decision maker is forced to exist. This article illustrates the use of a new capital structure model on an Indian Firm. The model is developed using a GP approach to decision making with accounting information. The economic, industry, and company-specific analysis of the capital structure practices is conducted with an Indian backdrop using a sample of top 500 listed Indian firms classified into 20 industries (see Appendix A) ranked by a popular financial daily The Economic Times in the year 2007. Company statistics on leverages over 10 years for the Indian Industry is assessed through long-term debt-to-equity ratio (LTD) and total debt-to-equity ratio (TDE). Behavioral dimensions of decision making for capital structures among Indian chief financial officers (CFOs) are assessed using a questionnaire approach that contains 19 questions and subquestions (Y. Agarwal, Iyer, & Yadav, 2009). We identified 96
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qualitative and quantitative considerations (Iyer & Agarwal, 2007) which a CEO/CFO evaluates simultaneously for CSDs. These considerations based on empirical investigation were narrowed to 67 quantitative variables using accounting information (see Appendix B). Interrelationships between the leverage variables and 66 other variables of 19 industries form the leverage constraint (for TDE see Appendix C and for LTD see Appendix D) using stepwise regression. Other firm-specific constraints are also developed using a stepwise regression method. Goals for a firm are identified after discussions with the management and quantitatively developed using accounting information. A GP model for CSDs under multiple objectives is then developed using these goal and constraints. The model is illustrated using a real life case study of an Indian firm, namely, a1 operating in agriculture sector.
Data Compilation
The top 500 companies were divided into 20 industries (see Appendix A). Among the 20 industries, finance industry (consisting of 56 companies) was not considered for evaluation as it contained banks, nonbanking financing companies (NBFCs), and financial institutions that are governed by the banking guidelines identified and issued by Reserve Bank of India. Capital Market Online database for Indian companies was used to compile the data for 10 years (from 1998 to 2007) for 67 variables. There were 10 companies for which the data were either incomplete or not available or incompatible for use. After removing the 56 finance companies and 10 not available companies, the sample size contained only 434 firms. A 10-year period from 1998 to 2007 is selected for study of 67 variables including leverage variables that were used to develop possible relationships that define goals and constraints for a firm. These relationships also assess the influence over the variables (TDE and LTD) that proxy capital structure. The study assesses whether leverages differ over time and across industries. The study also assesses the correlation between the leverage variables and other variables. Furthermore, whether these leverage ratios follow a normal probability distribution is assessed on time and industry classifications. The questionnaire with 19 questions was sent to these 434 companies. The survey results observed and published (Agarwal et al., 2009) are used to develop an empirical evidence that multiple considerations exist simultaneously that influence CSD. Among all existing financial models, GP technique was identified as an application tool that can handle multiple objective and constraints simultaneously. A case study was developed to illustrate the use of GP model for CSDs under multiple objectives.
Literature Review
In the past six decades, the field of CSDs has enlarged the dimensions of the influencing factors or acceptable variables, which decide the capital structure choices. In the earliest works we can find Harris (1954) did not initially restrict the definition of capital structures. He identified CSDs to support long- and short-term activities of business by making good any shrinkage in the asset values and decisions that provide necessary support for credit availability and banking solvency. Later, Dobrovolsky (1955) restricted its impact as decision that minimized cost besides raising funds. Value of the firm became synonymous to capital structure choices with the work of Durand (1959). Since then, the works have contributed to how different factors influence the value of a firm when the firm undertakes a decision for financing its activities, it included the work of Modigliani and Miller (1958,
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1963). Optimal capital structure and value of the firm is a concept for debate for over decades. The works of Schwartz (1959), Schwartz and Aronson (1967), Rao (1989), Singal and Mittal (1993), Rajan and Zingales (1995), Bahng (2002), Mohnot (2000), Miao (2005), Das and Roy (2007), and Iyer and Agarwal (2007) identified optimal capital structures that were constrained by industry dynamics and were studied with a background of a single objectivethe value of a firm. Given the various levels at which optimality of capital structures has been studied under the single objective framework of value of a firm, multiple objectives are classified under two heads of cost and benefits derived from a decision of the financing structure. To investigate the cost and benefits associated with financing decisions, the investigations have been spread over industries, countries, institutional frameworks, political divides, different ownership firms, and many others. Costs associated with capital structure of a firm are largely influenced by the proceeds generated from an issue of a financial instrument. Factors that influence the issue of debt, equity, and other instruments and their influence on the firm and its stake holders have to be investigated in different regions from different viewpoints. Likewise, the contributions of Jensen and Meckling (1976); Leland and Pyle (1977); Korajczyk, Lucas, and McDonald (1991); Matthew (1991); Gertner, Scharfstein, and Stein (1994); Neto and Marques (1997); Bolton and Von Thadden (1998); Subrahmanyam and Titman (1999); Kumar (2000); Almeida and Wolfenzon (2006); Verschueren and Deloof (2006); Dittman and Thakor (2007); and Helwege, Pirinsky, and Stulz (2007) have studied institutional frameworks that identified agency costs, agents self-motivated objectives, ownership objectives, and transparency objectives as factors that decide the debt equity mix. Furthermore, studies that concentrated on the cost advantage of cheap source of financing or adjustment cost and increase in profitability included the works of Jalilvand and Harris (1984); Myers and Majluf (1984); Myers (1984); Titman and Wessels (1988); Fischer, Heinkel, and Zechner (1989); Chatrath, Kamath, Ramachander, and Chaudhary (1997); Kakani (1999); Altinkilic and Hansen (2000); Roberts (2001); Pandey (2002); Fama and French (2002); Welch (2004); and Leary and Roberts (2005). Lately, Strebuleav (2007) also identified that higher business risk, bankruptcy cost, and a lower tax advantage all reduce optimal leverage. Among many considerations, the cost of the structure is largely to be influenced by factors like (a) risk management, (b) tax structures, (c) agency cost, (d) flotation/issuance cost, (e) regulatory frameworks, (f) term structures of interest rate, (g) exchange rate float and regulations, (h) technological advances (in real and money markets), (i) accounting gimmicks, (j) capital market sentiments/movements, (k) corporate liaison with market operators, and (l) government bodies that have been worked on by various research scholars world over. The works of Asquith and Mullins (1986); Baker and Wurgler (2002); Jung, Kim, and Stulz (1996); and Mickelson and Partch (1989) recognized market timing as a firms strategy to reduce cost that altered capital structures and increased the value of a firm. Similar to market timing, firms accessibility to cheap funds was developed as one among several other factors (openness in the economy, developments in the financial markets, credit rating, accreditation, investment environment, government support to industry and many others) that influenced cost. Graham and Harvey (2002) acknowledged that credit ratings were the second highest concern for CFOs when determining their capital structure. It was found that 57.1% CFOs found credit ratings as an important variable for the choice of the amount of debt that they would categorize to use. More commonly, market timing, media interventions, credit analysis, and their effect on CSD is an area of
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study in developed capital markets. Despite the range of the studies conducted on capital structure, no attempts have been made to integrate the efforts of these studies for universal applicability. The studies have been region specific, descriptive, and segmented, and they do not give a holistic view of the CSD process. Psychological aspects have also not been investigated in the decision making. Corporates in developing economies like India are often restricted to choose equity because of low security of creditors rights, low institutional penetration, and shallow capital markets and inadequate access to international capital markets. This study evaluated Indian firms for their leverage positions and debt structures before investigating multiple objectives the firms may pursue for their CSDs. The next section addresses the concerns for the use of debt by firms in a developing economy like India over a period when second phase of financial reforms have set pace and boom in the economy provides adequate access to domestic and international markets.
Capital Structure Practices in India

India and other Asian economies have been dependent on their savings for their financing needs at individual or corporate level. One wonders, if leverage has been used by Indian entrepreneurs to meet their needs. Our study finds that the mean (m) LTD was 1.064 and TDE was 1.16 for a 10-year period from 1998 to 2007. The leverages are well distributed in old and new economy stocks. Industries in India were found levered in the following ascending order: information technology, media and publishing, health care, fast moving consumer goods (FMCG), transport equipments, capital goods, miscellaneous, textiles, tourism, diversified, telecom, agriculture, consumer durables, oil and gas, power, housing related, metal, metal products and mining, transport services, and chemical and petrochemicals. LTD and TDE is found to be highest in the chemical and petrochemical industry, and lowest in the information technology industry. We found that capital structure positions among industries (interindustry) have significant differences (see Appendix E) statistically evidence using ANOVA and results to the pilot study have been published in (Iyer & Agarwal, 2007). However, time (intertemporal) had no influence over the CSDs in the industries (see Appendix F) statistically evidenced using ANOVA, and its results to the pilot study have been published (Iyer & Agarwal, 2007). The means (m) of capital structure were not significantly different for the 10-year period. Absence of intertemporal differences in the sample reflects low or no influence of economic changes on the leverage positions. Work of Rajan and Zingales (1995) also found that financial development does not seem to affect everybody equally, contrary to the common belief that country-specific development influences capital structure practices. The study (Iyer & Agarwal, 2007) used time differences as proxy for financial development over a 10-year period during which the financial liberalization in India had stabilized. Results of the study indicate that time-specific factors have little influence on mean (m) capital structure positions in the Indian industry. Among the two macroeconomic variables (economy and industry), industry was found to play an influencing role in India. This was in agreement with previous studies conducted in India for CSDs of Rao (1989), Babu (1998), Mohnot (2000), and Das and Roy (2007) who had investigated the interindustry differences in the capital structure of Indian firms and identified the possible sources of variations that existed in different industries. Our study also found that LTD and TDE for over 4,000 observations collected for 10year period did not follow a normal distribution (see Appendices G and H) evidenced using Jarque Bera Test (observation more than 50) and Anderson Darling Test (observations less
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than 50). The low level of leverages in value-creating firms needed more investigation into their possible asymmetries that existed in the Industry. Furthermore, the distribution was positively skewed in heavy assetbased industries like chemical and petrochemical firms and low tangible assetbased firms like information technology. On the assessment of firms in different industries, some industries were found to have normal distribution. For LTD, the two industries where normal distribution is observed are the capital goods industry and the tourism industry (see Appendix G). Normal distribution is also observed in the housing-related industry, information technology industry, and tourism industry for the TDE (see Appendix H). In the tourism industry, both LTD and TDE observed normal distribution. However, TDE, in most industries is not close to normal distributionfor instance, in case of chemical and petrochemical industry; consumer durables; diversified FMCG; metal and metal products; and transport services, there is no proximity to normal distribution that could be observed. Hence, there is need to investigate more into the possible factors affecting the leverage positions in these industries. Correlations between mmarket capitalization of 19 industries (for 10 years) and mLTD, mTDE were used in the study to estimate the relationship between leverage and market capitalization. Correlations between mEPS of 19 industries (for 10 years) and mLTD, mTDE were used in the study to estimate the relationship between leverage and EPS. In India, market capitalization (proxy for value of firm) was found to have low correlation with paid-up equity. Leverage ratios were found to be highly negatively correlated with market capitalization, all industries except high asset base industries like capital goods, chemical and petrochemical, health care, metal and metal products, oil and gas, tourism, transport equipment, transport services. Earnings per share (EPS) was found to be positively correlated with leverage for only 38% of the sample that offers contradiction to existing theories that EPS should be positively correlated with leverage. Quantitative and qualitative dimensions to the CSD need to be explored. Agarwal, Iyer, and Yadav (2008) identified these dimensions as multiple objectives and constraints influencing the capital structure. Behavioral dimensions to CSDs in India is in its premature stage. We used a questionnaire approach for identifying goals, motives, and constraints of a decision maker in a CSD. The questionnaire contained 19 questions and sub-questions based on 96 considerations outlined in our previous work (Agarwal et al., 2008), and was sent to CFOs of top 434 firms in India.
Multiple Objectives and Constraints for CSD Making

The questionnaire survey received a 15.6% response. Responses indicated that in India, firms follow simultaneous considerations. The study grouped these considerations as financial and nonfinancial objectives. Among the 68 respondents, there was consensus on the existence of multiple objectives. Firm-level differences on objectives and priorities existed. Moreover, priorities and goals have been found to be firm and time specific. The decision makers preferred equity over debt; target capital structure is not explicitly placed as a priority. Even then, they maintained a range for their capital structure. The maintenance of ownership stake and high interest burden motivated the firms to raise equity. The diluted EPS has acted as a main constraint for raising equity in India. The monitoring role of financial institutions has played a critical role for raising debt. Damp equity markets constrained premiums on equity issues. Bonus issues were perceived to have shortterm influence on stock prices. Stock splits and buybacks were not much used by the firms. Discounted cash flow techniques were largely used to evaluate CSD options.
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The decision makers wanted prime lending rates to come down and regulatory bodies to be more transparent, which have restricted their action for using debt. Exposures in international markets were hedged and were primarily used for business purpose as against speculation. Off balance sheet exposure were either not recognized as part of the CSDs or were not used. Other strategies such as bonus shares, stock splits, and buybacks did not receive sufficient response. It is also observed that the use of equity was more predominant than debt in the survey, which complements the finding of the previous investigation in Capital Structure Practices in India section. Firms believe that there is range of debt to equity mix that should be followed. However, there may not be a particular target value. The survey clearly gave the base for multiobjective frameworks for CSDs. The risk aversion was present among the decision makers. The study further emphasizes the need to develop models that resolve the present difficulty of providing satisficing solutions to multiple conflicting objectives for CSDs. The next section attempts to seek satisficing solutions to multiple goals and objectives for given priorities in CSDs. GP technique has been identified and applied to firms. Here, we illustrate it using a real life case study of an Indian firm operating in the agriculture sector.
GP Model for CSDs Using Accounting Proxies

Mathematical programming techniques such as linear programming, integer programming, and GP give a model framework that satisfies multiple objectives simultaneously. GP model was first of all developed by Charnes and Cooper (1961) as an extension and modification of linear programming model since the concept of GP problems. Later, Ijiri (1965) studied the detailed techniques of GP as developed by Charnes and Cooper. Ijiri reinforced and refined the concept of GP and developed it as a distinct mathematical programming technique. His study was primarily concerned with the development of the technique and its possible applications to accounting and management control. In addition, GP has also been applied by Charnes and Cooper (1968) and Lee (1973) to advertising media planning, man power planning and production, and so on. They further suggested that GP may be applied to an almost unlimited number of managerial and administrative decision areas such as allocation problem, planning and scheduling problems, policy analysis, and so on. Hawkins and Adams (1974) applied GP model to capital budgeting decision problem taking up Lorie and Savage case, and made a comparative analysis of optimal solutions as given by Weingartners linear programming solution. However, Hawkins and Adams have not taken into account the assignment of priorities to different objectives that a firm postulates to achieve in order of their importance. Although a GP model as developed and applied by Sang M. Lee, Ijiri, and others requires consistent ordering of priorities between the numbers of multiple sets, it can be applied using its linear approximations. Agarwal (1978) developed GP and a stochastic GP model to the capital budgeting decisions under risk and uncertainty. In the problem identified by him, projects were selected based on optimization solution derived after considering the multiple considerations as constraints. Agarwal (1978) extended the GP model to working capital management that operated on the premise that no specific theory undertakes the interrelationship between various current assets and liabilities, and in the past all studies have referred to the management of current assets as an isolated problem. In addition, Romero (1991) has presented a comprehensive overview of the technique, though not in finance but for engineering problems. GP technique is capable of handling decision problems that deal with (a) single goals only, (b) single goals with multiple subgoals, (c) multiple goals, and (d) multiple goals
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with multiple subgoals. In presence of incompatible multiple goals, the decision maker is to identify the importance of the individual goals. When all constraints and goals are completely identified in the model, the decision maker analyzes each goal in terms of deviations from the goal that are acceptable and state whether over- or underachievement of goal is acceptable or not. If overachievement is undesirable, positive deviation from the goal is eliminated from the objective function. If underachievement is undesirable, negative deviation from the goal is eliminated from the objective function. If the exact achievement of the goal is desired, both negative and positive deviations must be represented in the objective function. To give importance to the goals, negative and or positive deviations about the goal must be ranked according to the preemptive priority factors. The model considers high-order goal prior to the low-order goals. If there are goals in k ranks, the p preemptive priority factor pj (j = 1,2, . . . k) should be assigned to the negative and or positive deviational variables. The preemptive priority structure would have a relationship such as pj . . pj11, which implies that the multiplication of n, however large it may be, cannot make pj11 greater than or equal to pj. Weighting can also be used in the deviational variables at the same priority level. The criterion to be used in determining the differential weights of deviational variables is the minimization of the opportunity cost or regret. Hence, coefficient of regret is always positive and should be assigned to individual deviational variable with the identical pj factor. The objective functions of the GP problem consist of deviational variables with preemptive priority factors: pjs for ordinal ranking and ds for weighting at the same priority level. Let c be 2m component row vector whose elements are products pj and d such that c5d1 pj1 ; d2 pj2 ; . . . d2m pj2m 6:1
where pji (i = 1, 2, . . . 2m; j = 1, 2, . . . k) are preemptive priority factors, and highest preemptive factor p1 and dis (i = 1,2,. . . . 2m) are real numbers. Consider d to be 2m component column vector whose elements are d2s and d1s such that 1 1 1 d5 d1 ; d2 ; . . . dm ; d1 ; d2 ; . . . dm Then a GP problem is Minimize Subject to cd Ax1Rd5b x; d ! 0 6:3 6:2
where A and R are m 3 m and m 3 2m matrices, respectively. The model framework can be used to obtain satisficing solutions to the multiple goals and constraints faced in the GP model. In capital structure problems, quantitative relationships do not exist, which need to be developed using multiple regression analysis. The 19 industries with respect to the two leverage variables, LTD and TDE, are studied for their relationship with other variables through correlation and stepwise regression that develop the constraints that the industry possess on the CSD process of a firm. The study has not evaluated the effect of macroeconomic parameters like capital markets, economic growth rates, financial intermediation, and others as these factors in India were found to
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have insignificant effect on the leverages. Interindustry differences were found to be significant so the use of industry ratios and industry-leverage positions is used to develop the relationship between the variables. The relationship between TDE and other 66 variables for 19 industries is represented in Appendix C that would act as external constraints for firms in respective industries when using the GP model for the Indian industry. The relationship between LTD and other 66 variables that are accounting proxies for multiple objectives of 19 industries is represented in Appendix D that would act as external constraints for respective industries when using the GP model for the Indian industry. Management discussions are carried out to determine firm-specific goals and constraint as specified in the case study. The identified model is applied to firms to test for their validity. The model can be defined in the following manner for all firms aiming at satisficing solution for their CSDs. The study illustrates a real-life example of an Indian firm a1, name changed.
Case 1: a1 Company (Alpha One Company) in Agriculture Industry

The firm is into agriculture products business and has maintained its equity at Rs. 11.9 crores (for conversion into millions please see Appendix I) for the past 10 years. It is particular on not issuing any equity for growth. In the year 2007, the LTD of the company was 0.03 and TDE of the a1 company was 0.15. Internal funds have been the prime source of increasing the capital employed. The a1 company has observed the return on equity of 23.73% in past 1 year, which has been the highest for the past 10 years. The a1 company wishes to retain its ROE and wants to see an increase in this position for future. The a1 company from its marketing actions intends to seek the rate of growth of net sales by 8.5%. The company is attempting to look for new markets so that it can increase its sale to generate more profits. The a1 company intends to see that rate of growth of capital employed remains at 23.25% after adjusting for the profits as it does not intend to raise any debt but would like to reduce it, if possible. The a1 company believes in employing less debt and wishes to follow a more conservative approach. The a1 company is not adverse to the use of more capital but wishes to generate the same through internal funds. The a1 company has profit before interest, depreciation and tax margin of 12.26 which it feels would not improve in the future as the raw material costs are rising in India. Presently, a1 company employs a net working capital of Rs. 147.31 crores; it has a debtors velocity of 48 days, and the payout maintained by the a1 company is 16.79% and the cash flow from investing activities is Rs. 42.88 crores. The capital expenses in foreign exchange are zero. It does not intend to observe changes in these values for next few years. The a1 company presently enjoys a market capitalization of Rs. 401.87crores, which is the highest market capitalization observed by the a1 company for the past 10 years and wishes to only raise it and not lose its valuation. The a1 company also believes that higher leverage results in low market capitalizations. The a1 company has not attached any priority to the three goals. The firms goals have been identified by the study in the following manner: Goal A1: To retain and increase rate of return on equity (ROE) at 23.73% can be stated as ROE ! 23:73
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Goal A2: To observe a rate of growth of net sales (ROGNS) at 8.5, this is presently 7.9% is stated as ROGNS ! 8:5 Goal A3: To observe a rate of growth of capital employed at 23.25% is stated as ROGCE523:25 The deviations from the goals can be positive (d1) or negative (d2). The positive deviation (d1) in first two goals is desirable; however, the negative deviations (d2) from the goals are not desirable. The negative deviations violate the goal requirement and hence should be minimized for the first two goals. In the third goal, both positive (d1) and negative deviation (d2) are not desirable so both positive and negative deviations have to be minimized, for the exact attainment of the goal. In each goal when the deviational variables are introduced, the inequalities converted into equalities by introducing on left hand side (LHS), di(s) and the minimization function shall be established using the undesirable deviational variable that have to be minimized. The GP model for CSD for a company is as follows: Objective : Minimize z5d1 1d2 1 1d3 1d3 1 Subject to: Goal Constraint 1 Goal Constraint 2 Goal Constraint 3 Industry Constraint 1
: : : :
Industry Constraint 2
Firm Firm Firm Firm Firm Firm Firm Firm Firm Firm Firm Firm Firm Firm
Constraint Constraint Constraint Constraint Constraint Constraint Constraint Constraint Constraint Constraint Constraint Constraint Constraint Constraint
1 2 3 4 5 6 7 8 9 10 11 12 13 14
: : : : : : : : : : : : : :
ROE 2 d11 1 d12 = 23.731 ROGNS 2 d21 1 d22 = 8.51 ROGCE 2 d31 1 d32 = 23.251 TDE = 1.071 1 0.979 LTD 2 0.0007 PBIT 1 0.003 REFX 1 0.002ROGPBIDT 1 0.002ROGGB 1 0.040 CEFX 1 0.001ROGCE 1 0.001 FAR LTD = 20.812 1 1.085 TDE 1 0.001 NWC 2 0.016DV 1 0.013PO 1 0.000MC 1 0.001CFFI 1 0.010PBIDTM 2 0.008CEFX ROE = 0.399ROGCE 2 0.0105ROGPAT ROGCE = 74.31ROGRE 1 6.71ROGLTD ROGPBIT = 5.717 ROGNS ROGPAT = 172LTD 2 145.25TDE 2 0.21 ROGPBIT NWC = 97.84 TDE PBIT . 153.88 ROGGB . 3.8 NWC . 147.31 DV = 48 PBIDTM = 12.26 CFFI = 42.38 MC . 401.87 CEFX =0 PBDT . 166.24
Table 1. Goal Programming Solution for a1 Company Using Accounting Proxies for Goals and Constraints Objective Function: Minmize z5d 1d1 1d 1d1 1 2 3 3
Objective Function DECISION VARIABLES: Non Basic Variables
z = 0; LTD = 0; ROGLT = 0; d1 51; d 50; d1 50; d 51; d1 51; d 5 1 1 1 2 2 3
Variables (27)
ROGNS, ROGRE; ROGCE; ROE; ROGPB; TDE; PBDT; PBIT; ROGGB; MC; PO; ROGPAT; CFFI; REFX;
NWC; PBDTM; CEFX; FAR; DV; LTD; ROGLT: d ; d ; d ; d ; d ; d 1 2 3 1 2 3 Target value = 23.730a ROE = 23.730 ROGNS = 8.500 ROGCE = 23.250 = 8.500a = 23.250a Solution Deviations Sensitivity analysis RHS range 7.9251-39.8025 0.0000-1} 0.0000-63.4660
S. No.
Constraints
Goals 1.
ROE 2 d11 1 d12
2.
ROGNS 2 d21 1 d22
3.
ROGCE 2 d31 1 d32 = 1.071 TDE = 0.119
d11 d12 d21 d22 d31 d32 = = = = = =
1 0 0 1 1 1
Industry 4.
TDEb 2 0.979LTD 1 0.0007PBIT 2 0.003REFX 2 0.002PBDTM 2 0.002ROGGB 2 0.040CEFX 2 0.001ROGCE 1 0.001FAR
0.3400-1}
5.
1.085TDE 1 LTDc 1 0.001NWC 2 0.016DV 1
! 0.081
LTD = 0.000 PBIT = Rs. 257.310 cr REFX = Rs. 163.920 cr PBDTM = Rs. 166.240 cr ROGGB = Rs. 3.870% CEFX = 0.000cr ROGCE = 23.250% FAR = 6.550% TDE = 0.119
20.0476-0.8741 (continued)
369
Table 1. (continued) Target value Solution Deviations Sensitivity analysis RHS range
370
LTD = 0.000 NWC = 147.330 cr DV = 48.000days PO = 16.790% CFFI = 42.380cr PBTM = 12.260cr ROE = 23.730% ! 0.000 ROGCE = 23.250% S1 = 15.805 2}-15.8049 ! 0.000 ROE = 23.730% ROGPA = 115.440% ROGCE = 23.250% 2}-23.2500 ! 0.000 ! 0.000 S2 = 142.828 248.5945-1} 2}-142.8283 ROGLT = 0.000% ROGRE = 0.313% ROGPB = 48.595% ROGNS = 8.500% TDE = 0.119 ! 166.240 ! 152.880 ! 3.870 = 401.000 = 48.000 = 16.790 ! 115.440 = 42.380 LTD = 0.000 ROGPA = 115.440% ROGPB = 48.595% PBDT = 166.240 cr PBIT = 257.310 cr ROGGB = 3.870% MC = 401.000 cr DV = 48.000 days PO = 16.790% ROGPA = 115.440% CFFI = 42.380cr S3 = 104.430 0.0000-1} 2}-257.3104 0.0000-1} 0.0000-1} 39.9638-97.5718 0.0000-26.6808 0.0000-1} 0.0000-170.9600 (continued)
S. No.
Constraints
0.013PO 1 0.001CFFI 1 0.010PBTM 1 0.008ROE
Firm 6.
20.393ROGCE 1 ROEd 1 0.0105ROGPA
7.
ROGCEe 2 6.71ROGLT 2 74.31ROGRE
8.
ROGPBf 2 5.717ROGNS
9.
145.25TDE 2 172LTD 1 ROGPATg 1 0.21ROGPB
10. 11. 12. 13. 14. 15. 16. 17.
PBDTh PBITi ROGGBj MCk DVl POm ROGPATn CFFIo
Table 1. (continued) Target value = 163.920 ! 0.000 REFX = 163.920cr TDE = 0.119 NWC = 147.330 cr PBTM = 12.260 cr CEFX = 0.000 cr FAR = 6.550 NWC = 147.330 cr S4 = 145.919 Solution Deviations Sensitivity analysis RHS range 0.0000-1} 2}-145.9186 0.0000-25.1180 0.0000-1} 0.0000-737.5631 2.9958-275.9100
S. No.
Constraints
18. 19.
REFXp 211.91TDE 1 NWCq
20. PBIDTMr = 12.260 21. CEFXs = 0.000 22. FARs = 6.550 23. NWCt ! 147.330 Objective function: Minimize z = d12 1 d21 1 d32 1 d31 Objective z=0 function Decision LTD = 0; ROGLT = 0 variables Nonbasic d11 = 1, d12 = 0, d21 = 0, d22 = 1, d31 = 1, d32 = 1 variables
Note: Solution is obtained using POM Software. S1, S2, S3, S4 are slack variables. a Target values for the goals are based on the firms preferences and determined with the help of the management participation. b Total debt to equity (TDE) in the agriculture industry is dependent on long-term debt (LTD), profit before interest and tax (PBIT), revenue earning in foreign exchange (REFX), rate of growth in profit before interest, depreciation and tax (ROGPBIDT), rate of growth of gross block (ROGGB), capital earning in foreign exchange (CEFX), rate of growth of capital employed (ROGCE), and fixed asset ratio (FAR). This has been identified through the stepwise regression, please refer Appendix C. c Long-term debt to equity (LTD) in the agriculture industry is dependent on total debt to equity (TDE), net working capital (NWC), debtors velocity (DV), payout (PO), market capitalization (MC), cash flow from investing activities (CFFI), profit before interest, depreciation, tax margin (PBIDTM), capital earning in foreign exchange (CEFX). This has been identified through a stepwise regression, please refer Appendix D. d Rate of return on equity (ROE) is dependent on the rate of growth of capital employed (ROCE) and rate of growth of profit (ROGPAT), which has been developed using the firms 10 years data and multiple regression analysis. e Rate of growth of capital employed (ROCE) is dependent on rate of growth of retained earnings (ROGRE) and rate of growth of long-term debt (ROGLTD). The rate of growth of paid up equity is not considered as the equity in the past 10 years has remained constant at Rs. 1.29 crores and the firm does not intend to change ROGCE. f Rate of growth of profit before interest and taxes (ROGPB) is dependent on the rate of growth of net sales (ROGNS). g Rate of growth of profit after tax (ROGPAT) is dependent on long-term debt (LTD), total debt to equity (TDE), rate of growth of profit before interest and taxes (ROGPBIT). h Firms wants that profit before depreciation and tax (PBDT) should not fall below the present level of Rs. 166.24 crores. i Profit before interest and taxes (PBIT) has to be higher than the present level of operations in the year 2007 at Rs. 153.88 crores.
371
372
Table 1. (continued)
___________________________________________________________________________________________________________________
Rate of growth of gross block (ROGGB) is 3.88, which can be greater than the previous year as the firm intends to purchase equipments. Market capitalization is attempted to be higher than the present level, management is not interested in maintaining its market capitalization and only in increasing it. l Firm intends to maintain its debtors velocity at 48 days, it may choose to reduce it in future but not at present. Firm does not intend to increase it as would then increase its requirement for the net working capital. m The firm intends to keep its payout ratio (PO) at 16.42%. n The firm intends to have its rate of growth of profit after tax (ROGPAT) more than Rs. 115.440 crores. o The firm stands invested in a manner that provides for cash from investing activities (CFFI) which is Rs. 42.53 crores and there is no scope for improvement. p Firm does not have capital earning from foreign exchange (CEFX) and does not intend to have the same in future and intends to maintain its revenue earnings (REFX ) at 163.92 crores. q Net working capital (NWC) and total debt to equity (TDE) relationship has been determined, keeping TDE as independent and assuming that current liabilities finance most of the current assets and the total debt is used to finance it. r The firm with its operation has profit before interest, depreciation, and tax margin (PBIDTM) as Rs. 12.29 crores, which is retainable with cost efficiencies. s The firm is satisfied with its fixed asset ratio (FAR) of 6.550. t Net working capital (NWC) of the firm with present operation is Rs.147.31 crores, and it cannot reduce it with its present form of operation and terms.
Agarwal et al.
373
Description of variables is given in Appendix J. Table 1 gives the GP model solution for the agriculture firm with the formulation. For explanation on the constraints and goal please see notes to the Table 1. There are, in all 3 goals with no priorities, 2 industry constraints and 14 firm constraints of the a1 company. There are a total of 19 constraint equations. There are 27 variables, including the deviational variables. POM software has been used to seek the GP solution in its linear formulations. The results are presented in Table 1. On the 26th iteration, the software achieved the solution that would minimize the value of z to zero such that ROE is 23.73%, ROGNS is 8.5%, and ROGCE is 23.25 %, which were the goals. The ROGRE would be 0.313%, ROGPBIT has reduced to 48.595%, TDE is reduced to 0.119, PBDT is the constraint met at Rs. 166.240 crores, PBIT has increased at Rs. 257.310 crores, ROGGB is maintained at the constraint level of 3.870%, MC was found to be Rs. 401.87, PO was also found to be maintained at 16.790%, ROGPAT was same as the previous year of Rs. 115.440 crores, CFFI is also maintained at Rs. 42.380 crores, REFX was also maintained at Rs. 163.920crore, NWC was also maintained at Rs. 147.330 crores, PBIDTM is also maintained at 12.260%, and CEFX which was a constraint was also zero. However, the fixed asset ratio has increased to FAR 6.550. DV was to be at the constraint level of 48.000 days. The a1 company would have a rate of growth of sales at 8.5% which increases its ROCE by 23.25%, the total debt to equity would reduce from the present level of 0.15 to 0.11, and it is proposed that the long-term debt that was 0.03 may be paid back to keep a zero level of long-term debt. The REFX is also maintained as a non basic variable that take up the value of zero in the solution.
Concluding Remarks
GP model is identified as a multicriteria technique providing satisficing solutions that overcomes the deficiency of the single objective framework using accounting proxies for multiple objective framework. The steps involved in the development of a firm-specific, CSD process is (a) management participation; (b) analysis of objectives, goals, and policies using accounting proxies; (c) formulation of a GP model; (d) testing the model and solution; and (e) final implementation of the solution. The model allows simultaneous solutions to a system of complex multiple objectives. It utilizes an ordinal hierarchy among conflicting multiple goals where lower order goals are considered after higher order goals are satisfied or have reached the desired limit. There is an inbuilt flexibility in the model. A GP model for multiobjective CSD using accounting proxies has been tested on an Indian Agricultural Firm. The model supports the fulfillment of multiple objectives and constraints simultaneously. The model may prove to be highly beneficial for firms in achieving an optimum or satisficing practical solution to CSDs incorporating multiple goals in a systematic and scientific way in todays complex and dynamic business world with accounting information.
374
Appendix A. Industry Composition of ET 500 Companies S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Industry composition Agriculture Capital goods Chemical and petrochemical Consumer durables Diversified Finance FMCG Health care Housing related Information technology Media and publishing Metal, metal products, and mining Miscellaneous Oil and gas Power Telecom Textile Tourism Transport equipments Transport services Total Number of companies in each industry 26 46 35 18 12 56 25 27 41 33 6 32 30 15 9 12 21 3 40 13 500 Percentage of the industries in the sample survey 5.20 9.20 7.00 3.60 2.40 11.20 5.00 5.40 8.20 6.60 1.20 6.40 6.00 3.00 18.00 2.40 4.20 0.60 8.00 2.60 100.00
Appendix B. List of Accounting Proxies Variables Equity paid up Networth Capital employed Gross block Net working capital (Incl. Def. Tax) Current assets (Incl. Def. Tax) Current liabilities and provisions (Incl. Def. Tax) Total assets/liabilities (excl revaluation and written off expenses) Gross sales Net sales Other income Value of output Cost of production Selling cost Profit before interest depreciation and taxes Profit before depreciation and taxes Profit before interest and taxes Profit before taxes Profit after tax Cash profit Revenue earnings in forex Revenue expenses in forex Abbreviations EP NET CE GB NWC CA CL TAL GS NS OI VO COP SC PBIDT PBDT PBIT PBT PAT CP REFX REXFX (continued)
Agarwal et al.
Appendix B. (continued) Variables Capital earnings in forex Capital expenses in forex Book value (unit currency) Market capitalization Cash earnings per share (annualized; unit currency) Earnings per share (annualized; unit currency) Dividend (annualized %) Payout (%) Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities ROG-net worth (%) ROG-capital employed (%) ROG-gross block (%) ROG-gross sales (%) ROG-net sales (%) ROG-cost of production (%) ROG-total assets (%) ROG-profit before interest, depreciation, and taxes (%) ROG-profit before depreciation and taxes (%) ROG-profit before interest and taxes (%) ROG-profit before taxes (%) ROG-profit after tax (%) ROG-cash profit (%) ROG-revenue earnings in forex (%) ROG-revenue expenses in forex (%) ROG-market capitalization (%) Debt-equity ratio Long-term debt-equity ratio Current ratio Fixed assets ratio Inventory ratio Debtors ratio Interest cover ratio Profit before interest, depreciation, and tax margin (%) Profit before interest tax margin (%) Profit before depreciation and tax margin (%) Cash profit margin (%) Amortized profit after tax margin (%) Return on capital employed (%) Return on networth (%) Debtors velocity (days) Creditors velocity (days) Value of output/total assets Value of output/gross block
375
Abbreviations CEFX CEXFX BV MC CEPS EPS DIV PO CFFO CFFI CFFF ROGNET ROGCE ROGGB ROGGS ROGNS ROGCOP ROGTA ROGPBIDT ROGPBDT ROGPBIT ROGPBT ROGPAT ROGCP ROGREFX ROGREXFX ROGMC TDE LTD CR FAR IR DR ICR PBITM (%) PBITM (%) PBDTM (%) CPM (%) APATM ROCE (%) RONW (%) DV CV VOTA VOGB
376
Explanatory power R SE None With TDE R2 With TDE Variables positively correlated (r = 0.90) VOTA None None None CFFF, CFFI None PBIDTM None
Appendix C. TDE Industry Constraint Equations (19 Industries) Variables negatively correlated (r = 20.90)
S. No. Industry
TDE constraint equation
Agriculture
Capital goods
Chemical and petrochemicals Consumer durables
Diversified industry
FMCG
7 8 9
Health care Housing related Information technology
1 1 79 PBDTM, CPM, PAT, PBT, PBDT, MC, TDE = 1.071 1 0.979 LTD 2 0.0007 PBIT 1 CP, and LTD 0.003 REFX 1 0.002ROGPBIDT 1 0.002ROGGB 1 0. 040 CEFX 1 0.001ROGCE 1 0.001 FAR TDE = 0.754 1 0.001ROGMC 2 0.002CFFF 1 0.976 0.953 0.02048 CFFO, EP, ROGCOP, ICR, OI, IR, 0.014 PBIDTM CEXFX, DR, PBIDTM, CV, PBDTM, ROCE, PBITM, CPM, LTD, CEFX, and PO TDE = 22.295 1 1.502LTD 2 0.000ROGCP 1 1 0.999 0.1216 LTD 0.003CE TDE = 0.397 1 1.21LTD 1 0.028 OI 2 1 0.999 0.01933 LTD 0.013CEPS 2 0.002PBT TDE = 0.530 1 1.087LTD 2 0.073CR 1 0.999 0.998 0.02427 LTD 0.008EPS TDE = 1.038 1 0.092VOGB 2 0.008APATM 1 0.999 0.08282 REXFX, ROGNS, ROGTA, IR, ROGGS, REFX, CEXFX, ICR, REXFX, MC, PAT, PBT, CP, NWCPBDT, DIV, PBIT, PBIDT, NET, CFFO, CL, CA, CE, OI, COP, VOGB, NS, VO, GS, CEPS, GBTAL, SC, PBITM, EPS, ROCE, PO, PBIDTM, DV, BV, CR, DR, FAR, EP, CV, VOTA, and LTD TDE = 0.142 1 1.155 LTD 0.993 0.987 0.0122 LTD TDE = 0.188 1 1.022LTD 1 0.000ROGMC 0.999 0.999 0.031071 LTD TDE = 20.070 1 2.069LTD 2 0.001DIV 0.966 0.934 0.0335 None
(continued)
Appendix C. (continued) Explanatory power R None None R2 SE With TDE With TDE Variables positively correlated (r = 0.90) Variables negatively correlated (r = 20.90)
S. No. Industry
TDE constraint equation
10
Media and publishing
11
12 13 14
None None None None
15
16
17 18
None None None
19
TDE = 0.434 1 0.866LTD 1 0.139CR 1 1 1 0.0007 LTD 0.005CV 1 0.000PBT 2 0.001DV 1 0.000EP 1 1 0.0049 LTD Metal and metal TDE = 0.045 1 1.098LTD 1 0.001ROGGS 1 product 0.000ROGPBIDT 1 0.002ICR 1 0.000ROGGB 2 0.002CV Miscellaneous industry TDE = 1.470 2 0.062APATM 1 0.001ROGMC 0.949 0.901 0.0497 None Oil and gas industry TDE = 1.715 2 0.004ROGPBDT 0.868 0.754 0.05673 LTD Power TDE = 0.523 1 0.962LTD 2 0.3.1CPM 1 0.021 0.999 0.999 0.0183 LTD PBITM Telecom TDE = 21.168 1 1.525LTD 2 0.361VOGB 1 1 1 0.0163 LTD 0.000PAT 1 0.001ROGPAT Textile TDE = 20.176 1 1.493LTD 1 0.001ROGMC 1 1 0.999 0.01369 CEPS, BV, EPS, and LTD 0.031FAR Tourism TDE = 0.015 1 1.049LTD 0.999 0.998 0.01134 LTD Transport equipments TDE = 0.196 1 0.1073LTD 1 0.004CV 2 0.968 0.937 0.01185 None 0.014CPM Transport services TDE = 20.134 1 1.047LTD 1 0.005DV 2 1 1 0.005032 ROGMC, LTD 0.001ROGMC 1 0.005ROCE
377
378
Explanatory power R SE 0.0012 TDE with LTD 1 1 R2 Variables positively correlated (r = 0.90) with LTD APATM 1 1 1 1 1 1 0.00731 TDE VOTA 0.01146 CFFO, EP, CFFF, ROGCOP, ICR, OI, IR, CEXFX, DR, PBIDTM, CV, PBDTM, ROCE, PBITM, CPM, CEFX, PO, and TDE None 0.999 0.08091 EP, ICR, GB, CPM, APATM, REFX, ROGNS, ROGGS, PBDTM, CFFO, ROGMC, and TDE 0.996 0.0417 TDE None None 0.99 0.982 0.1774 CFFF, CFFI None PBIDTM None ROGGS, ROGPAT, IR, REFX, CEXFX, ICR, REXFX, PAT, MC, PBT, CP, PBDT, PBIDT, CFFO, NWCCL, NET, CA, OI, SC, CEPS, COP, VOGB, NS, VO, CE, DIV, PBIT, GS, EPS, GB, ROCE, TAL, PBITM, BV, PBIDTM, DV, PO, DR, FAR, EP, CV, VOTA, CR, and TDE 1 1 0.00055 DR, CFFI, CEPS, VOTA, PO, CR, BVVOGB, FAR, and TDE 1 0.999 0.03036 PO, ROGPAT, BV, ROGCE, CFFI, VOTA, ROGNW, and TDE 0.97 0.934 0.0335 None
Appendix D. LTD Industry Constraint Equations (19 Industries) Variables negatively correlated (r = 20.90)
S. No.
Industry
LTD constraint equation
Agriculture
Capital goods
LTD = 20.812 1 1.085 TDE 1 0.001 NWC 2 0.016DV 1 0.013PO 1 0.000MC 1 0.001CFFI 1 0.010PBIDTM 1 0.008CEFX LTD = 0.304 1 0.000PO 2 0.571TDE 2 0.157CR
Chemical and petrochemicals
LTD = 1.574 1 0.664TDE 2 0.000ROGCP 2 0.002CE
Consumer durables
Diversified industry
FMCG
LTD = 1.509 1 1.001TDE 1 0.035VOGB 1 0.000REXFX LTD = 20.133 1 0.0839TDE 2 0.002CFFO 10.001ROGCP 1 0.001RONW 1 0.001ROGGS LTD = 20.013 1 0.582 TDE
Health care
LTD = 20.046 1 0.857 TDE 2 0.004ROCE
Housing related
LTD = 20.179 1 0.976TDE 1 0.000ROGMC
Information technology
LTD = 20.025 1 0.476TDE 1 0.001DIV 1 0.000CFFF 1 0.006FAR
(continued)
Appendix D. (continued) Explanatory power R SE TDE TDE None None with LTD R2 Variables positively correlated (r = 0.90) Variables negatively correlated (r = 20.90) with LTD
S. No.
Industry
LTD constraint equation
10 11
Media and publishing Metal and metal product TDE TDE TDE TDE TDE TDE None ROGPBIT, ROGMC, and TDE
12 13 14
ROCE None None None None None None None
15
16 17 18 19
LTD = 0.130 1 0.707TDE 2 0.005RONW 0.97 0.93 0.02422 1 0.0044 LTD = 20.041 1 0.911TDE 1 0.001ROGGS 1 1 0.002ICR 1 0.000ROGGB 2 0.002CV 1 0.000ROGPBIDT Miscellaneous industry LTD = 1.715 2 0.072ROCE 1 0.005ROGTA 0.97 0.939 0.0394 Oil and gas industry LTD = 0.311 1 0.150CEPS 2 0.205EPS 1 0.99 0.19315 Power LTD = 20.023 1 0.883TDE 2 0.000CL 1 1 0.997 0.0309 0.000CFFF Telecom LTD = 0.767 1 0.655TDE 2 0.237VOGB 1 1 1 0.0107 0.000PAT 1 0.000ROGPAT Textile LTD = 0.118 1 0.669TDE 2 0.001ROGMC 1 0.999 0.00916 Tourism LTD = 0.013 1 0.951TDE 1 0.998 0.0108 Transport equipments LTD = 0.126 1 0.554TDE 0.83 0.691 0.0154 Transport services LTD = 0.128 1 0.955TDE 2 0.005DV 1 1 1 0.0048 0.001ROGMC 2 0.004ROGCE
379
380
2007 0.81 0.94 1.36 0.67 1.11 0.61 1.72 0.33 0.66 1.07 0.33 0.74 0.58 0.5 1.22 0.84 0.73 0.53 0.33 1.72 1.39 0.82 0.7 0.6 0.5 0.7 0.6 0.6 0.8 0.3 0.4 1 0.2 0.3 0.7 0.6 0.5 0.5 0.7 0.7 0.5 1.6 7.5 1.7 6.7 2.4 0.8 1.9 1.6 0.7 2.7 0.4 0.6 3.6 1.1 5.6 2 1.6 1.2 0.6 0.91 6.87 1.2 6.06 1.8 0.21 1.1 1.29 0.31 1.66 0.22 0.25 2.86 0.49 5.16 1.49 0.95 0.42 0.1 2006 2005 2004 2003 2002 2001 2000 1999 1998 Min Max Range Average 1.1 2.42 1.19 2.06 1.12 0.66 1.05 0.54 0.45 1.52 0.31 0.45 1.79 0.76 1.18 1.05 0.93 0.96 0.59 0.73 0.58 0.59 1.17 0.61 0.57 0.86 0.51 0.51 1 0.26 0.35 1.36 0.58 0.48 0.66 1.04 1.09 0.6 0.26 1.36 1.09 0.71 0.69 0.94 0.51 0.96 0.61 0.64 0.82 0.49 0.44 1.11 0.29 0.41 2.48 0.68 0.52 0.54 1.62 1.08 0.62 0.29 2.48 2.18 0.81 0.85 7.4 0.49 1.78 0.75 0.67 0.78 0.35 0.35 1.56 0.31 0.51 0.92 0.79 0.59 0.56 0.97 1.03 0.58 0.31 7.4 7.09 1.12 0.97 7.45 1.66 6.74 0.75 0.77 0.8 0.34 0.39 1.31 0.44 0.48 1.24 0.77 0.65 1.36 0.67 0.83 0.63 0.34 7.45 7.12 1.49 1.13 2.11 1.08 3.02 0.71 0.73 0.83 0.5 0.44 2.06 0.3 0.34 3.59 0.8 1.03 2.02 0.66 0.82 0.62 0.3 3.59 3.29 1.2 1.27 1.49 1.57 1.74 2.4 0.72 0.75 0.49 0.44 1.7 0.21 0.41 3.6 0.91 0.98 0.97 0.77 0.96 0.57 0.21 3.6 3.39 1.16 1.35 1.07 1.7 1.53 1.4 0.62 0.9 1.62 0.38 1.28 0.27 0.39 1.61 1.07 0.7 1.19 0.95 1.15 0.58 0.27 1.7 1.42 1.04 1.58 1.2 1.55 2.15 1.54 0.61 1.16 0.37 0.4 1.45 0.27 0.58 1.16 0.77 5.63 1.02 0.89 1 0.63 0.27 5.63 5.36 1.26 1.6 1 1.36 0.81 1.31 0.64 1.86 0.36 0.53 2.66 0.38 0.56 1.16 0.68 0.73 1.01 0.87 0.86 0.61 0.36 2.66 2.3 1
Appendix E. Summary of 10 Years LTD for 19 Industries
S. No.
Industry
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Agriculture Chemical and petrochemicals Power Transport services Consumer durables Capital goods Diversified FMCG Health care Housing related Information technology Media and publishing Metal, metal products, and mining Miscellaneous Oil and gas Telecom Textiles Tourism Transport equipments Minimum Maximum Range Average
Appendix F. Summary of 10 Years TDE for 19 Industries 2006 1.06 1.02 1.51 1.47 1.22 0.8 0.64 1.4 0.39 0.56 1.96 0.83 0.93 0.64 1.54 2.07 1.19 0.14 0.8 0.68 0.14 2.24 2.1 1.11 1.29 0.65 0.77 0.64 2.48 0.55 0.93 1.05 0.39 2.48 2.09 1.07 1.43 0.71 0.78 0.6 1.55 0.82 0.85 1.89 0.42 11.13 10.71 1.6 1.37 0.89 1.89 1.42 1.13 0.74 0.88 6.82 0.55 12.04 11.48 2.02 1.32 1.11 1.37 2.8 1.05 0.54 0.92 3.17 0.39 3.57 3.18 1.53 1.36 1.18 1.88 1.36 1.22 0.41 0.89 1.85 0.36 4.18 3.82 1.48 1.41 0.94 2.04 1.61 1.46 0.29 0.88 1.63 0.29 2.06 1.77 1.3 1.19 0.83 1.86 1.41 1.38 0.24 0.92 2.25 0.24 2.25 2.01 1.26 1.12 0.89 1.59 1.48 1.33 0.16 0.92 0.92 0.16 2.88 2.72 1.28 0.93 0.61 0.77 0.6 1.05 0.14 0.8 0.68 1.43 1.18 2.04 2.8 2.48 0.82 0.93 6.82 0.51 0.57 1.26 2.2 1.43 0.69 0.13 6.14 1.43 1.08 11.13 1.62 1.2 0.74 0.55 1.88 0.42 0.63 1.16 1.67 1.16 12.04 1.48 1.18 0.95 0.6 1.57 0.64 0.55 1.5 1.88 1.09 2.81 1.3 1.24 1.01 0.67 2.32 0.49 0.39 3.57 2.06 1.11 1.97 3.04 1.18 0.99 0.67 1.93 0.36 0.46 4.18 2.06 0.98 1.76 1.96 1.21 2.02 0.57 1.51 0.42 0.43 1.6 2.18 0.94 1.87 2.07 1.51 0.74 0.58 1.71 0.5 0.65 1.08 2.14 1 1.46 1.94 2.32 0.67 0.75 2.88 0.74 0.73 1.21 1.41 0.96 1.34 1.87 2.24 0.66 0.91 1.3 0.54 1.06 0.9 0.96 1.3 1.18 0.66 0.55 1.24 0.36 0.39 0.83 2.18 1.16 12.04 3.04 2.32 2.02 0.91 2.88 0.74 0.73 4.18 1.12 0.26 11.07 1.74 1.14 1.36 0.36 1.64 0.38 0.34 3.35 1.7 1.02 3.69 1.82 1.45 0.93 0.67 1.77 0.49 0.54 1.84 1.26 0.84 1.48 1.42 1.44 0.43 0.89 2.16 2005 2004 2003 2002 2001 2000 1999 1998 Min Max Range Average
S. No.
Industry
2007
1 2 3 4 5 6 7 8 9 10 11
1.1 0.9 0.96 1.49 1.23 0.77 0.72 1.24 0.38 0.44 1.29
12 13 14 15 16 17 18 19
Agriculture Capital goods Chemical and petrochemicals Consumer durables Diversified FMCG Health care Housing related Information technology Media and publishing Metal, metal products, and mining Miscellaneous Oil and gas Power Telecom Textiles Tourism Transport equipments Transport services Min Max Range Average
1.19 0.61 1.06 0.8 1.58 0.44 0.93 1.31 0.38 1.58 1.2 0.97
381
382
Appendix G. Industry Wise Normal Distribution Test Results for LTD LTD Jarque Bera Probability Anderson darling (A2) Probability LTD Jarque Bera Probability Anderson darling (A2) Probability AGRI 0.91 0.63 0.33 0.44 MMMP 1.68 0.43 0.87 0.01 CG 0.65 0.72 0.32 0.45 MIS 0.74 0.69 0.34 0.41 CP 3.13 0.19 1.75 0 CD 2.26 0.32 0.59 0.08 DIV 2.74 0.25 1.35 0 PO 1.25 0.53 0.66 0.055 FMCG 18.95 0 2.06 0 TELE 1.26 0.53 0.38 0.32 HC 2.23 0.33 0.49 0.167 TEX 6.93 0.03 0.41 0.26 HR 2.24 0.33 0.48 0.175 TSM 0.69 0.71 0.25 0.65 IT 0.87 0.65 0.36 0.35 TE 1.51 0.47 0.42 0.26 MP 0.77 0.68 0.28 0.53 TS 1.06 0.01 1.11 0
OG 21.17 0 2.41 0
Appendix H. Industry Wise Normal Distribution Test Results for TDE TDE Jarque Bera Probability Anderson darling (A2) Probability TDE Jarque Bera Probability Anderson darling (A2) Probability AGRI 13.6 0 43 0.23 MMMP 0.63 0.73 1.05 0 CG 2.28 0.32 0.23 0.73 MIS 1.9 0.39 0.37 0.34 CP 1.9 0.39 1.85 0 OG 13.6 0 0.32 0.47 CD 1.33 0.52 0.66 0 DIV 0.7 0.7 1.69 0 PO 2.28 0.32 0.44 0.22 FMCG 2.8 0.25 1.41 0 TEL 1.9 0.39 0.41 0.27 TS 1.33 0.52 0.83 0.02 HC 1.5 0.47 0.42 0.25 HR 0.69 0.71 0.43 0.24 TEX 0.67 0.72 0.21 0.79 IR 0.69 0.71 0.42 0.24 TSM 2.8 0.25 0.55 0.11 MP 7.87 0.02 0.28 0.52 TE 1.5 0.47 1.06 0
Appendix I. Units of Currency Measurement 1 Crore (1,00,00,000) 1 Lakh (1,00,000) 1 Million (1,000,000) 1 Billion (1,000,000,000) 1 Crore (1,00,00,000) 10 0.1 0.1 100 100 Million Million Crores Crores Lakh
Agarwal et al.
Appendix J. Abbreviations Explanations to the Table 1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. Z = Goal function to be minimized ROE = Return on equity d11 = Positive deviation from goal 1 d12 = Negative deviation from goal 1 (violating variable) ROGNS = Rate of growth of net sales d21 = Positive deviation from goal 2 d22 = Negative deviation from goal 2 (violating variable) ROGCE = Rate of growth of capital employed d31 = Positive deviation from goal 3 (violating variable) d32 = Negative deviation from goal 3 (violating variable) TDE = Total debt to equity ratio LTD = Long-term debt to equity PBIT = Profit before interest and taxes REFX = Revenue earning from foreign exchange PBDT = Profit before depreciation and taxes ROGGB = Rate of growth of gross block CEFX = Capital earning in foreign exchange ROGCE = Rate of growth of capital employed NWC = Networking capital DV = Debtors velocity PO = Payout MC = Market capitalization CFFI = Cash flow from investing activities PBIDTM = Profit before interest, depreciation, tax margin ROGPBIT = Rate of growth of profit before interest and taxes ROGNS = Rate of growth of net sales ROGLTD = Rate of growth of long-term debt ROGRE = Rate of growth retained earning
383
Acknowledgments
The authors gratefully acknowledge the technical support of Indian Institute of Technology, Department of Management Studies (IIT Delhi), and Indian Institute of Finance. Yamini would like to convey special thanks to her Chairman Prof. J. D. Agarwal, her professors in IIT Delhi, and her colleagues at IIF DelhiProf. Aman Agarwal, Mr. Deepak Bansal, and Mr. Pankaj Jain for their assistance in preparation of this article. Yamini would also like to thank the referees and the editorial board members of the Journal of Accounting, Auditing & Finance (JAAF) for their valuable comments and recommendations.
Authors Note
The views presented in the article are opinions of the authors, based on their research and experience, and do not depict views of institution or countries to which the authors belong. All errors and omissions are their own.
Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the authorship and/or publication of this article.
Funding
The author(s) received no financial support for the research and/or authorship of this article.
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Yamini Agarwal1, K. Chandrashekar Iyer1, and Surendra S. Yadav2

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