Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
' See, for example, Lintner (1956); Brigham (1975); Porwa l (1976);
Gitman and Forrester (1977); Gitman and Mercurio (1982);
Moore and Reichert (1983), Stanley and Block (1984), Baker,
Farrelly, and Edelman (1985); Wong, Farragher and Leung
(1987); Pandey (1989); Pinegar and Wilbricht (1989); Wansley,
Lane, and Sarkar (1989); Bierman (1993); Drury, Braund and
Tayles (1993); Sangster (1993); Donaldson (1994); Epps and
Mitchem (1994); Gilbert and Reichert (1995); Harris and Ramsay
(1995); Jog and Srivastava (1995); Poterba and Summers (1995);
The author is grateful to Professor Satya Prakash Singh, UBS, Trahan and Gitman (1995); Billingsley and Smith (1996);
Panjab University, Chandigarh and two anonymous referees for Cherukuri (1996); Helwege and Dang (1996); Shao and Shao
t h e i r c o n s t r u c t i v e c o m m e n t s a n d v a l u a b l e s uggestions. The (1996); Chadwell-Hatfield, et al. (1997);); Bodnar, Hayt, and
author is also thankful to the CFOs of Corporate India who Marston (1998); Bruner, et al., (1998); Block (1999); Kester and
responded to the survey. The author acknowledges the financial Chang (1999); Mohanty (1999); Fan and So (2000); and Graham
support from the Management Development Institute, Gurgaon. and Harvey (2001).
Size (Mkt.
Capitalization) 0.33*** 0.36***
Export Sales/ (-)0.142 -0.127 0.233**
Sales
ROCE (-)0.072 -0.211 0.303*** -0.096
EVA (-)0.438*** (-).764*** 0.014 0.083 0.383***
WACC 0.067 -0.007 0.063 -0.052 -0.073 0.003
LTD/TV (-)0.038 0.129 -0.217 0.041 (-).379*** (-).318*** -0.16
P/E Max. (-)0.119 -0.124 0.326*** 0.355*** 0.067 0.125 0.137 -0.123
P/E Min. {-)0.074 -0.119 0.368*** 0.229** 0.158 0.196 0.19 -0.189 0.757***
CA/Non CA 0.1 0.094 0.001 0.097 -0.048 -0.119 -0.035 0.119 0.055 0.113
Sector (Private/ 0.539*** 0.524*** 0.009 -0.065 -0.18 (-).423*** -0.128 -0.023 -0.156 -0.204 -0.121
Public)
***, "denote a significant difference at the , 5% respectively.
1%
management by structuring contracts, monitoring evidence on negative returns to the bidder on the
expenditure by the principal, bonding expenditure announcement of acquisition. Management resists
by the agent, and the opportunity loss as agency cost. value-maximizing takeovers or resorts to certain anti-
Copeland and Weston (1983) argue that the takeover amendments to corporate charters when it
shareholders face a trade-off between monitoring feels threatened by the loss of private benefit of
costs and forms of compensation which will cause control and thus reduces shareholders' wealth (see,
the agent to always act in the shareholders' interests. for example, Walking and Long, 1984; DeAngelo and
Brealey and Myers (2000) ask whether it is Rice, 1983; and Jarrell and Poulsen, 1988). Pandey
desirable for management to act in the selfish and Bhat's (1990) study of 57 Indian companies finds
interests of the shareholders. The management must that, in practice, managers in India do not aim at
pursue actions that are optimal for a broad class of maximizing the market value of their firms while
stakeholders rather than those that serve only to making financial decisions. The study concludes that
maximize shareholders' interests (see, for example, the four important goals pursued by Indian
Mitchell, Agle and Wood, 1997; Agle, Mitchell and companies are: ensuring the availability of funds,
Sonnenfield, 1999; Berman et al, 1999; and Ogden maximizing growth, maximizing operating profits
and Watson, 1999). Bodie and Merton (2000) assume before interest and taxes, and maximizing the rate
that the goal of maximizing shareholders' wealth does of return on investment.
not necessarily conflict with other desirable social
Results of the Present Study
goals. Jensen (2001) argues that social welfare is
maximized when each firm in an economy maximizes The respondents were asked to indicate the relative
its total market value. It includes not only the value importance of different objectives of management
of equity but also market values of all other financial decision-making in corporate finance in their orga-
claims including debt, preferred "Stock, and warrants. nization. While 85.10 per cent of the respondents
A considerable amount of evidence is available consider the objective to maximize earnings before
that show that management may not always act in interest and tax (EBIT) and earnings per share (EPS)
the best interest of the investors particularly the as very important/important, 75.90 per cent of the
shareholder. Jensen (1986) documents the example respondents consider the objective to maximize the
of oil industry in 1984 to demonstrate the agency spread between return on assets (ROA) and WACC,
cost of free cash flows. Roll (1986) surveys the i.e., EVA objective as very important / important.
% ~ry Mean Si;:e (Sales) Si~e (Assets) Sizy (Market Cap.) Export Sales
Important Small Lirge SmaO Lqrge Small Large Low Hig/1
or
Important
i) To Maximize EBIT/EPS 85.10 4.48 4.59 4.37 4.56 4.39 4.61 4.31 4.46 4.49
ii) To Maximize the Spread
between ROI and WACC (EVA)
75.90 3.99 3.55 4.44 3.55 ......... 3.45 4.5ou 3.68 4.27*
% Very Mean Size (Sales) Size (Assets) Size (Market Cap.) Export Sales
Important Small Large Small Large Small Large Low High
or
Important
i) Payback Period 67.50 3.79 3.82 3.76 3.85 3.73 4.11 3.46*** 3.79 3.78
ii) Accounting Rate of Return 34.60 2.62 2.53 2.70 2.42 2.80 2.79 2.30 2.46 2.76
iii) Net Present Value Method (NPV) 66.30 3.73 3.56 3.88 3.44 4.00 3.26 4.11*** 3.56 3.88
iv) Internal Rate of Return (IRR) 85.00 4.36 4.08 4.63* 4.08 4.63** 4.00 4.69*** 4.54 4.20
v) Profitability Index (PI) 35.10 2.51 2.56 2.47 2.56 2.47 2.36 2.54 2.75 2.29
vi) Break-even Analysis 58.20 3.58 3.77 3.40 3.49 3.68 3.82 3.37 3.53 3.63
% Very Mean ROCE EVA WACC Long-term
Important Debt
or Low High Low High Low High Low High
Important
i) Payback Period 67.50 3.79 3.83 3.75 3.73 3.85 3.90 3.68 3.56 4.00
ii) Accounting Rate of Return 34.60 2.62 3.05* 2.20 2.92 2.33 2.66 2.58 2.22 2.98
iii) Net Present Value Method (NPV) 66.30 3.73 3.51* 3.93 3.85 3.61 3.85 3.61 3.87 3.59
iv) Internal Rate of Return (IRR) 85.00 4.36 4.43 4.30 4.60 4.51 4.18 4.54 4.44 4.29
v) Profitability Index (PI) 35.10 2.51 2.83 2.23 2.74 2.31 2.49 2.54 2.62 2.43
vi) Break-even Analysis 58.20 3.58 3.72 3.45 3.77 3.40 3.51 3.65 3.45 3.71
Mean P/EMax. P/EMin. CA Sector
% Very
Important Low High Low High No Yes Private Public
or
Important
i) Payback Period 67.50 3.79 3.75 3.81 3.78 3.78 3.45 3.90 3.77 3.90
ii) Accounting Rate of Return 34.60 2.62 2.80 2.35 2.77 2.38 2.55 2.64 2.56 3.00
iii) Net Present Value Method (NPV) 66.30 3.73 3.59 3.70 3.65 3.65 4.14 3.58 3.63 4.40*
iv) Internal Rate of Return (IRR) 85.00 4.36 4.08** 4.57 4.19 4.46 4.20 4.42 4.30 4.80
v) Profitability Index (PI) 35.10 2.51 2.45 2.34 2.39 2.40 2.20 2.63 2.35 3.67**
vi) Break-even Analysis 58.20 3.58 3.69 3.43 3.89 3.24** 3.55 3.59 3.54 3.89
respondents who use CAPM take industry average and are more likely to use CFO's estimate of beta
beta as a measure of their systematic risk. The second as compared to large firms (31.25% versus 7.14%).
and third most popular sources of beta are published
source (20.45%) and self-calculated ( 18.18%). Large Table 8 explores CFO's choice of index and
firms (based on sales} and highly profitable firms share price data period for making an estimate of
(based on ROCE) are more inclined to use self- beta. Nearly 65 per cent of the respondents consider
calculated beta than the small firms and low the last five-year monthly share price data to estimate
profitable firms. The small firms do not calculate beta equity beta. The use of monthly share price data
Table 9: Survey Response to the Question on the Tax Rate Used to Calculate After Tax Cost
of Debt and the Weights They Use in the Computation of WACC of the Firm
% Use Size (Sales) Siy (Assets) Size (Market Cap.) Export Sales
Small Large Small Large Small Large Low High
i) Current Statutory Tax Rate 91. 25 92.50 90.00 92.50 90.00 87.18 94.74 97.50 85.00**
iii) Minimum Alternative Tax 11 25 10.00 12.50 10.00 12.50 12.82 10.53 3.75 15.00
i) Book Value Weights .
41. 47.50 35.90 42.50 41.03 51.28 31.58* 37.50 46.15
80
ii) Market Value Weights 22 .80 20.00 25.64 17.50 28.21 12.82 34.21** 25.00 20.51
iii) Target Capital Structure Weights 39 .20 40.00 38.46 45.00 33.33 41.03 36.84 35.00 43.59
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