Asian Journal of Management

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

Capital Intensity, Financial Leverage and Market Valuations in India:Evidence from a Panel of FMCG Firms


Affiliations
1 Sri C Achutha Menon Government College, Thrissur, Kerala - 680014, India
     

   Subscribe/Renew Journal


Capital intensity and firms’ valuation has been one of the most debatable topic of research for the past many years and keeps many researchers continue to investigate. This paper, covering the recent ten year financials from the annual reports of 15 leading FMCG firms in India`, proposes to link the capital intensity with firms’ profitability and capital gearing practices. The ultimate goal of the research is to investigate the effect of capital intensity on market valuation of firms measured by Tobin’s q. The panel regression procedure pursued in the study traces out the effect of capital intensity in the variations in financial leverage of firms. The debt overhangs in liabilities in the form of larger debt to equity structure, inversely affects the market valuation of FMCG firms in India. The research eventually challenges the classical capital structure theories explaining the positive correlations between capital gearing practices and market valuation of firms.

Keywords

FMCG, Capital Intensity, Tobin’s Q.
Subscription Login to verify subscription
User
Notifications
Font Size


  • Adami, R., Gough, O., Muradoglu, G., and Sivaprasad, S. (2010). The Leverage Effect on Stock Returns. Retrieved from https://pdfs.semanticscholar.org/17ef/b4fea19c6ddd7111a5c45bd974b26ee6f775.pdf

  • Aydemir, C., Gallmeyer, M. and Hollifield, B. (2007). Financial Leverage and Leverage Effect -A Market and Firm Analysis, March. Available at http://repository.cmu.edu/cgi/viewcontent.cgi?article=1140andcontext=tepper

  • Baker, S. (1973). Risk, Leverage and Profitability: An Industry Analysis. The Review of Economics and Statistics, 55(4), 503-507.

  • Brealey, R., and Myers, S. (1984). Principles of Corporate Finance. New York: McGraw-Hill.

  • Christie, A. A. (1982). The Stochastic Behavior of Common Stock Variances - Value, Leverage, and Interest Rate Effects.Journal of Financial Economics, 10, 407-432.

  • Damodaran, A. (1996). Investment Valuation: Tools and Techniques for Determining the Value of any Asset. New York: John Wiley and Sons.

  • Dimitrov, V. and Jain, P.C. (2005). The Value Relevance of Changes in Financial Leverage. Available at http://ssrn.com/abstract= 708281

  • Duffee, G. R. (1995). Stock Returns and Volatility: A Firm Level Analysis. Journal of Financial Economics, 37, 399-420 9. George, T.J. and Hwang, C.Y. (2006). Leverage, Financial Distress and the Cross-section of Stock Returns. Available at http://ssrn.com/abstract=890838

  • Gordon, M. J. (1959). Dividend Earnings and Stock Prices. The Review of Economics and Statistics. 41, 99-105 11. Gupta, J., Bunkanwanicha, P., Khaskovo, S. and Spieser, P. (2016). Do Financial Indicators Drive Market Value of Firms in the Transition Economies? The Russian Case. Journal of Emerging Market Finance, 15(2), 225-268.

  • Harris, F.H. (1986). Market Structure and Price-Cost Performance under Endogenous Profit Risk. Journal of Industrial Economics, 35, 35-60.

  • Lintner, J. (1956). Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes. The American Economic Review, 46(2), 97-113.

  • Martin, S. (1983). Market, Firm and Economic Performance. Salomon Brothers Monograph Series. In Finance and Economics, N.Y.U. Graduate School of Business.

  • Modigliani, F. and Miller, M.H. (1958). The Cost of Capital, Corporation Finance and Theory of Investment. The American Economic Review, 48(3), 261-297.

  • Nissim, D. and Penman, S.H. (2003). Financial Statement Analysis of Leverage and How it Informs about Profitability and Market-to-Book Ratios. Review of Accounting Studies, 531-560.

  • Penman, S.H., Richardson, S.A. and Tuna, I. (2005). The BooktoPrice Effect in Stock Returns: Accounting for Leverage. Journal of Accounting Research, 45(2), 427-467 18. Schwartz, E. (1959). Theory of the Capital Structure of the Firm. Journal of Finance, 14(1), 18-39.

  • Sharma, A. K. (2006). Financial Leverage and Firm’s Value: A Study of Capital Structure of Selected Manufacturing Sector Firms in India. The Business Review, 6(2), 70-76.

  • Tobin, J., and Brainard W. C. (1968). Pitfalls in Financial Model Building. The American Economic Review, 58(2), 99-122.

  • Tobin, J., and Brainard W. C 1977). Asset Markets and the Cost of Capital. In R. Nelson and B. Balassa (Eds), Economic Progress: Private Values And Public Policy (Essays in Honor of William Fellner), 235-262.


Abstract Views: 445

PDF Views: 0




  • Capital Intensity, Financial Leverage and Market Valuations in India:Evidence from a Panel of FMCG Firms

Abstract Views: 445  |  PDF Views: 0

Authors

T. G. Saji
Sri C Achutha Menon Government College, Thrissur, Kerala - 680014, India
K. V. Eldhose
Sri C Achutha Menon Government College, Thrissur, Kerala - 680014, India

Abstract


Capital intensity and firms’ valuation has been one of the most debatable topic of research for the past many years and keeps many researchers continue to investigate. This paper, covering the recent ten year financials from the annual reports of 15 leading FMCG firms in India`, proposes to link the capital intensity with firms’ profitability and capital gearing practices. The ultimate goal of the research is to investigate the effect of capital intensity on market valuation of firms measured by Tobin’s q. The panel regression procedure pursued in the study traces out the effect of capital intensity in the variations in financial leverage of firms. The debt overhangs in liabilities in the form of larger debt to equity structure, inversely affects the market valuation of FMCG firms in India. The research eventually challenges the classical capital structure theories explaining the positive correlations between capital gearing practices and market valuation of firms.

Keywords


FMCG, Capital Intensity, Tobin’s Q.

References