Financial determinants of value based performance of construction firms in India

Abstract

Purpose

The purpose of the study is to examine the value-based performance of firms in construction sector in India using Tobin's Q and Market Capitalization (MCAP) and then determine their significant financial drivers.

Design/methodology/approach

The study is based on data from 87 firms engaged in infrastructure, real estate, industrial construction and allied areas in India over a study period of 10 years. Three distinct forms of panel regression models have been developed using Tobin's Q and MCAP as dependent variables. The models developed are using Baltagi's (1981) Error Component 2SLS, Varadharajan-Krishnakumar's (1987) Generalized 2SLS and Arellano – Bower/Blundell – Bond's (1991) dynamic panel.

Findings

The study found that MCAP is a better suited value-based performance measure for construction sector firms in India. The study further reports that the age of the firm, profit after tax, investment in research and development, dividends, leverage and net fixed asset are significant positive drivers, whereas cash flow is a significant negative driver.

Research limitations/implications

The study is limited to a geographic location; therefore, the findings of this study cannot be generalized.

Practical implications

As MCAP is a better suited value-based performance measure of a firm in the construction sector, managers should focus on improving profitability, higher research and development activities, higher dividends and higher expenditures on net fixed assets for improvement.

Originality/value

This is an original attempt to examine the value-based performance of firms in the construction sector in India using Tobin's Q and MCAP.

Citation

Singla, H.K. and Prakash, A. (2023), "Financial determinants of value based performance of construction firms in India", International Journal of Productivity and Performance Management, Vol. 72 No. 4, pp. 1025-1050. https://doi.org/10.1108/IJPPM-05-2021-0264