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1 – 10 of over 18000Roshan and Niti Nandini Chatnani
This study investigates the relationship between working capital investment (WCI) and firm value for Indian manufacturing firms using excess net working capital (NWC) and Tobin's…
Abstract
Purpose
This study investigates the relationship between working capital investment (WCI) and firm value for Indian manufacturing firms using excess net working capital (NWC) and Tobin's Q as a measure of WCI and firm value, respectively. The study also examines whether firms use the cash released from excess investment in working capital to make long-term investments.
Design/methodology/approach
The sample comprises 834 Bombay Stock Exchange (BSE) listed Indian manufacturing firms whose data from April 2010 to March 2020 are analyzed using a fixed-effect panel regression analysis approach.
Findings
The empirical results show that excess NWC influences firm value negatively and significantly. However, the nature of the relationship becomes nonlinear upon dividing the sample into positive excess NWC and negative excess NWC. The findings from the study also reveal that firms redistribute cash freed from positive excess NWC for long-term investments to improve their value without impacting the corresponding risk.
Practical implications
Overall, the results suggest that firms with positive excess NWC can enhance their valuations by building adequate long-term investments from surplus WCI funds.
Originality/value
To the authors’ best knowledge, studies on this issue have primarily focused on developed economies. No study seems to have been done on this subject in the emerging South Asian economies. The present study is the first to bridge the research gap by investigating the relationship between excess WCI and firm value for manufacturing firms in India. Moreover, it examines whether a positive excess NWC reduction translates into corporate investments (CI).
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Ben Amoako-Adu, Vishaal Baulkaran and Brian F. Smith
The chapter investigates three channels through which private benefits are hypothesized to be extracted in dual class companies: excess executive compensation, excess capital…
Abstract
Purpose
The chapter investigates three channels through which private benefits are hypothesized to be extracted in dual class companies: excess executive compensation, excess capital expenditures and excess cash holdings.
Design/methodology/approach
With a propensity score matched sample of S&P 1500 dual class and single class companies with concentrated control, the chapter analyzes the relationship between the valuation discount of dual class companies and measures of excess executive compensation, excess capital expenditure and excess cash holdings.
Findings
Executives in dual class firms earn greater compensation relative to their counterparts in single class firms. This excess compensation is more pronounced when the executive is a family member. The value of dual class shares is discounted most when cash holdings and executive compensation of dual class are excessive. Excess compensation is highest for executives who are family members of dual class companies. The dual class discount is not related to excess capital expenditures.
Originality/value
The research shows that the discount in the value of dual class shares in relation to the value of closely controlled single class company shares is directly related to the channels through which controlling shareholder-managers can extract private benefits.
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Sirus Sharifi, Arunima Haldar and S.V.D. Nageswara Rao
The purpose of this paper is to analyse the relationship between operational risk management (ORM), size, and ownership of Indian banks. This is important in the context of…
Abstract
Purpose
The purpose of this paper is to analyse the relationship between operational risk management (ORM), size, and ownership of Indian banks. This is important in the context of financial crisis experienced by developed countries due to lax regulation.
Design/methodology/approach
ORM practices of Indian banks are proxied by excess capital (over the required minimum capital for operational risk). Size of a bank is measured as deposits plus advances. Our sample includes 61 Indian banks during the period from 2010 to 2013. The authors empirically examine the impact of bank size on excess capital using panel data regression model.
Findings
The results suggest that size of Indian banks is inversely related to excess capital held by them for managing operational risk. The inverse relationship implies that smaller banks hold higher excess capital over the required minimum as per Basel norms. There is no significant relationship between ownership (public, private and foreign) and excess capital held by banks for managing operational risk.
Practical implications
The study has implications for Indian banks given the high level of losses due to bad loans, and the implementation of Basel III norms by the central bank, i.e. Reserve Bank of India.
Social implications
The study has implications for Indian financial system as a large percentage (about 33 per cent) of household savings are deployed in deposits with commercial banks and other financial institutions. The bank failure(s) can have disastrous consequences for the Indian economy as the capacity of the Indian financial system to withstand such shocks is highly doubtful.
Originality/value
There is very little evidence on ORM practices of Indian banks, and its relationship with size and ownership. The study assumes significance in the context of significant changes in the institutional and regulatory framework.
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Eric Osei-Assibey and Joseph Kwadwo Asenso
This paper aims to investigate the influence of the central bank’s regulatory capital on commercial banks specific performance outcomes such as credit supply, interest rate spread…
Abstract
Purpose
This paper aims to investigate the influence of the central bank’s regulatory capital on commercial banks specific performance outcomes such as credit supply, interest rate spread (as a measure of efficiency) and non-performing loans (NPLs).
Design/methodology/approach
Using specific commercial bank-level panel data from 2002-2012, a system of equations was modeled that allows us to apply the system generalized methods of moment approach and estimate the equations, while controlling for specific bank level, industry and macroeconomic variables.
Findings
The study finds a positive relationship between a net minimum capital ratio and the net interest margin. Although this is in contrast with the study expectations, the result suggests that a high net minimum capital requirement would widen the spread between the lending and saving rates. The study further finds evidence to support the fact that high minimum capital requirement and excess capital above the minimum required drive credit growth in the banking sector of Ghana. However, high excess capital increases risk-taking activities of the banks, as excess capital is found to be associated with high NPL ratios.
Practical implications
Given the economic benefits and costs of sharply increasing bank regulatory capital, our results speak to the ongoing debates on the right level of capital, the effectiveness of the Bank of Ghana policy rate (PR) and the high lending rates that appear to respond only slowly to macroeconomic indicators such as the PR and the inflation rate. The finding also has practical implications for the adoption of the Basel III accord.
Originality/value
The empirical literature has not paid enough attention to the impact of regulatory capital on the three specific bank-level outcomes – NPLs, interest rate spread and the nature of interrelationships among these variables, particularly in the African context.
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Ahsan Akbar, Xinfeng Jiang and Minhas Akbar
The present study aims to investigate the impact of working capital management (WCM) practices on the investment and financing patterns of listed nonfinancial companies in…
Abstract
Purpose
The present study aims to investigate the impact of working capital management (WCM) practices on the investment and financing patterns of listed nonfinancial companies in Pakistan for a span of 10 years.
Design/methodology/approach
The study is based on secondary financial data of 354 listed nonfinancial Pakistani firms during the period of 2005–2014. The two-step generalized method of moment (GMM) regression estimation technique is employed to ensure the robustness of results.
Findings
Empirical testing reveals that: excessive funds tied up in working capital have a negative impact on the investment portfolio of sample firms. Besides, a negative relationship between change in fixed assets and excess net working capital posits that, eventually, firms use idle resources tied up in short-lived assets to boost their investment activities. Furthermore, larger working capital levels were associated with higher leverage ratio which indicates that firms with inefficient WCM policies have to rely heavily on long-term debt to meet their short-term financing requirements. Additional results indicate that firms that take more time to sell inventory and convert receivables to cash, make more use of debt. Results of cash management models illustrate that cash-rich firms have lower leverage levels which signal the strong financial health and internal revenue generation capability of such firms.
Originality/value
There is a dearth of empirical studies that examine the implications of WCM decisions on a firm's capital structure. Besides, these studies are only confined to how a WCM policy influences the long-term investment activities of a firm. The research contributes to the extant literature by empirically revealing a link between the WCM practices and the firm's long-range investment and financing patterns. Hence, financial managers shall account for the impact of their short-term financial management decisions on the capital structure of the firm.
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The article highlights potential mismeasurement in working capital allocations among academicians and practitioners and revisits the relationship between firms' working capital…
Abstract
Purpose
The article highlights potential mismeasurement in working capital allocations among academicians and practitioners and revisits the relationship between firms' working capital and productivity, as evident from their values.
Design/methodology/approach
The research design acknowledges the relative role of firms' working capital vis-a-vis other assets in generating revenue, thereby effectively accounting for the overall asset efficiency in influencing firm value. The authors use a multivariate framework to draw inferences from the marginal impact of working capital and its components on firm value while controlling for asset utilization.
Findings
The authors find that, after accounting for asset utilization, the marginal impact of working capital and its components on firm value is quite weak. The results are consistent with the hypothesis that firms' trade-off between short-term and long-term assets per se should not have any value implications. After controlling for their asset turnovers, the authors find that higher allocations to working capital relative to other assets are not necessarily value-destructive. The findings contrast with the past literature.
Research limitations/implications
The article, through its analytical and empirical insights, suggests that working capital allocations should be measured by managers and academicians relative to firms' other asset rather than their sales. Firm values should, therefore, be compared based on firms' overall asset utilization rather than inter-temporal allocations to short-term versus long-term assets.
Originality/value
Contrary to the existing literature so far, the article explicitly acknowledges the relative role of firms' other assets, and hence the overall asset utilization, to infer the marginal impact of working capital on firm value.
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Oyebola Fatima Etudaiye-Muhtar and Zayyad Abdul-Baki
This paper investigates the role of market structure and institutional quality in determining bank capital ratios in developing economies.
Abstract
Purpose
This paper investigates the role of market structure and institutional quality in determining bank capital ratios in developing economies.
Design/methodology/approach
The generalised methods of moment technique is used to control for auto-correlation and endogeneity in a sample of 79 publicly listed commercial banks. The study period is between 2000 and 2016.
Findings
Results show that market structure (proxied with bank competition) as well as institutional quality (regulatory quality) lowers bank capital in the sampled banks. This suggests that banks operating in less competitive markets with good regulatory quality do not need to engage in excessive risk-taking activities that would necessitate holding increased level of capital. Furthermore, the interaction of competition and regulatory quality reinforces the main findings, suggesting the importance of the two variables in determining bank capital ratio.
Research limitations/implications
Research has limitation in that the study investigated publicly listed commercial banks, the findings may not be applicable to non-listed banks.
Practical implications
Taking into cognisance the developing nature of the banking system in Africa, the findings from this study imply that the maintenance of an improved regulatory quality in an environment where healthy competition exists would encourage banks to hold capital ratios appropriate for their level of banking activities, that is, the banks would not engage in excessive risk-taking activities.
Originality/value
This is one of the first papers that examine the effect of market structure and institutional quality on bank capital ratios in developing countries that have bank-based financial systems.
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Thomas L. Hogan, Neil R. Meredith and Xuhao (Harry) Pan
The purpose of this study is to replicate Avery and Berger’s (1991) analysis using data from 2001 through 2011. Although risk-based capital (RBC) regulation is a key component of…
Abstract
Purpose
The purpose of this study is to replicate Avery and Berger’s (1991) analysis using data from 2001 through 2011. Although risk-based capital (RBC) regulation is a key component of US banking regulation, empirical evidence of the effectiveness of these regulations has been mixed. Among the first studies of RBC regulation, Avery and Berger (1991) provide evidence from data on US banks that new RBC regulations outperformed old capital regulations from 1982 through 1989.
Design/methodology/approach
Using data from the Federal Reserve’s Call Reports, the authors compare banks’ capital ratios and RBC ratios to five measures of bank performance: income, standard deviation of income, non-performing loans, loan charge-offs and probability of failure.
Findings
Consistent with Avery and Berger (1991), the authors find banks’ risk-weighted assets to be significant predictors of their future performance and that RBC ratios outperform regular capital ratios as predictors of risk.
Originality/value
The study improves on Avery and Berger (1991) by using an updated data set from 2001 through 2011. The authors also discuss some potential limitations of this method of analysis.
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Fusheng Xie, Ling Gao and Peiyu Xie
This paper examines the different features of China's economic development in different stages of economic globalization. The study finds that the investment- and export-based…
Abstract
Purpose
This paper examines the different features of China's economic development in different stages of economic globalization. The study finds that the investment- and export-based growth model drove China's high-speed economic growth between 2000 and 2007, which came into existence around 2000 when China plugged into the global production network.
Design/methodology/approach
This paper also finds that China slowed down to the New Normal because of the disruption to the socio-economic underpinnings of this growth model. As China adapts to and steers the New Normal, supply-side structural reforms can channel excess capacity to the construction of underground pipe networks in rural areas of central China and fix capital while advance rural revitalization.
Findings
At the same time, enterprises must strive to build a key component development platform for key component innovation and the standard-setting power in global manufacturing.
Originality/value
The establishment of a domestic production network integrating the integrated innovation-driven core enterprises and modular producers at different levels can satisfy the dynamic demand structure of China in which standardized demands and personalized demands coexist.
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