Excess Cash Flow: A Signal for Institutional and Corporate Governance

Cover......Page 1
Contents......Page 8
List of Tables......Page 13
List of Figures......Page 16
Acknowledgements......Page 17
1.1 Introduction......Page 18
1.2 India\'s capital markets......Page 21
1.3 Overview of Indian financial sector reforms......Page 23
1.4 Inflows into India\'s capital markets......Page 25
1.5 Purpose of study......Page 26
1.6 Plan of study......Page 28
2.1 Introduction......Page 30
2.2 Asymmetric information approach to investment......Page 31
2.3 Managerial/principal agent theory of investment......Page 33
2.4 Managerial/principal agent vs. asymmetric information: some empirical facts......Page 35
2.5 Further issues......Page 38
3.1 Introduction......Page 40
3.2 Purpose......Page 41
3.3.1 Basic assumptions......Page 42
3.3.2 Free cash flow theory: dividend recommendation......Page 43
3.3.3 Dividend signalling model......Page 45
3.3.4 Free cash flow theory: debt recommendation......Page 46
3.3.5 Empirical evidence for the free cash flow theory......Page 47
3.4 Asymmetric information, imperfect capital markets and the \'Flight to Quality\'......Page 48
3.4.1 Imperfect capital markets: the lemons problem......Page 49
3.4.2 Imperfect capital markets: credit rationing......Page 50
3.4.3 Internal vs. external finance: asymmetric information costs and intermediation......Page 51
3.4.4 Banking relationships and the asymmetric information problem......Page 52
3.5.1 Asymmetric information in the free cash flow theory framework......Page 53
3.5.2 Financial flexibility and its benefits......Page 54
3.5.3 Excess cash strategies......Page 55
3.5.4 Finance hierarchies......Page 56
3.5.6 Using excess cash as collateral......Page 57
3.5.7 An example of financial fragility and the use of debt......Page 59
3.6.1 Mechanisms with real economic consequences: the lending channel......Page 60
3.6.3 Inventory response and firm size......Page 63
3.6.4 Investment effects on the macroeconomic level......Page 64
3.7 Firm model comparing earnings retention, re-investment, and external borrowing......Page 65
3.7.2 Expected return of the earnings disbursement strategy......Page 68
3.7.3 Comparison of returns......Page 69
3.7.4 Estimating benchmark cases for the model......Page 73
3.7.6 The premium φ: costs of asymmetric information......Page 79
3.7.7 The case of recessions and booms......Page 81
3.8.1 Foundations for empirical investigation......Page 83
3.8.2 Examining actual firm investment behaviour......Page 84
3.8.3 Examination of past evidence from excess cash predictions......Page 88
3.8.4 Regression of investment after monetary contraction......Page 91
3.8.5 Formula for retained earnings......Page 92
3.9 Conclusion......Page 97
4.1 Introduction......Page 99
4.2.1 Institutional characteristics of financial markets in India......Page 100
4.2.2 Capital structure: theory......Page 104
4.3 Financing hierarchies......Page 105
4.4 Target leverage models......Page 107
4.5 Agency costs of leverage......Page 108
4.6 Research methodology......Page 110
4.6.2 Statistical model......Page 111
4.7 Results......Page 114
4.7.1 Discussion......Page 118
4.8 Leverage and profitability......Page 119
4.9.1 Data......Page 120
4.9.2 Statistical model......Page 122
4.10 Results......Page 123
4.11 Policy implications......Page 127
4.12 Conclusion......Page 129
5.1 Introduction......Page 131
5.2 Bankruptcy management in India: SICA and BIFR......Page 132
5.3.1 Alignment of managerial incentives......Page 134
5.4 Bankruptcy effects of corporate leveraging in Indian firms......Page 137
5.5.1 Treatment of bankruptcy by India\'s financial sector......Page 141
5.5.2 Bargaining power between banks and firms......Page 142
5.5.3 The public interest: subsidies, sacrifices, and accounting practices......Page 143
5.5.4 Violations of the \'absolute priority rule\'......Page 146
5.6.1 Introduction......Page 149
5.6.3 Background......Page 150
5.6.4 Research methodology and data......Page 153
5.6.5 Results......Page 156
5.7 Policy implications of reforms in Indian bankruptcy proceedings......Page 163
5.8 Conclusion......Page 166
6.1 Introduction......Page 168
6.2 Takeover policy in India......Page 170
6.3.1 Introduction......Page 172
6.3.2 Purpose......Page 173
6.3.3 Background......Page 174
6.3.4 Research methodology and data......Page 176
6.3.5 Results......Page 178
6.4.2 Theory......Page 186
6.5 Basic model of no-predation contracting......Page 192
6.6 Further issues......Page 196
6.7 Conclusion and policy implications......Page 197
7.1 Conclusion......Page 199
7.2.2 Examination of cash retention strategies......Page 200
7.2.3 Effects and determinants of debt......Page 201
7.2.5 Factors affecting the market for corporate control......Page 203
7.3 Limitations of study and future work......Page 204
7.4 Further policy implications......Page 205
Appendix 1 Derivation of model constraints......Page 208
Appendix 2 Deriving the relationship between investment probability and φ......Page 210
Notes......Page 212
Bibliography......Page 219
C......Page 229
E......Page 230
G......Page 231
I......Page 232
M......Page 233
S......Page 234
Z......Page 235