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Impact Factor.1.14
Emperor International Journal of Finance and Management Research [EIJFMR] ISSN: 2395-5929
@Mayas Publication Page 15
RELATIONSHIP BETWEEN FINANCIAL STRUCTURE AND PRODUCTIVITY OF
SELECTED INDIAN FIRMS
Mr.G.RAMESH
Assistant Professor of Commerce
Asan Memorial College of Arts & Science College,
Jaladampet, Chennai-100
A.S.SWAMINATHAN
Senior Accounts Officer
Mobile Electronics – Trichy
Abstract
This present study is concerned with
relationship between financial structure
and productivity of selected Indian steel
firms. Traditionally financial structure has
been seen as a purely financial problem
without any reference to production
theory. In as much as all the firms are
responsible for economic activity which
involves production of goods and services,
it should be obvious that there would be
some relationship between production
theory and finance theory. While firms
needs to be financially viable for
continuing production, it is equally true
that economic activity, production and real
variables, including productivity, would
contribute to this financial viability. For a
continued existence and growth, firms
have to undertake decisions in relation to
financing of growth.
Introduction
Traditionally financial structure has been
seen as a purely financial problem without
any reference to production theory. In as
much as all the firms are responsible for
economic activity which involves
production of goods and services, it should
be obvious that there would be some
relationship between production theory
and finance theory. While firms needs to
be financially viable for continuing
production, it is equally true that economic
activity, production and real variables,
including productivity, would contribute to
this financial viability. For a continued
existence and growth, firms have to
undertake decisions in relation to financing
of growth.
The contention of this thesis is that such a
financing decision and consequent
financial structure would be integrally
linked to production activity, production
theory, productivity, efficiency and
growth. It needs to be understood that
finance is not an end in itself; rather it is a
means for the continued existence of the
firm. Productivity, innovation,
Paper ID: 13170403
Impact Factor.1.14
Emperor International Journal of Finance and Management Research [EIJFMR] ISSN: 2395-5929
@Mayas Publication Page 16
technological progress and efficiency
contribute to the growth of the firm. In an
accounting sense, this related to the ‘Going
concern concept’. Each ‘going concern’
aims at continued production activity. This
is clear cut indication of the integral
relationship. The ‘going concern’ cannot
survive unless this relationship exists.
Methodology
First of all we have framed our variables
required for the study. The variables are of
two types, i.e. the real variables and the
financial variables. We have used time
series analysis for the computation of total
factor productivity (TFP), which is a real
variable. And for our final model, we have
used cross sectional analysis. Through this,
we have tried to find out the relationship
between financial structure and
productivity; the real and financial
determinants of financial structure.
Objectives of the study
The objectives of the study are as under:
1. To study the financial structure
theories and production theories.
2. To measure productivity growth and
financial structure.
3. To examine the linkages between
financial structure and productivity
theory.
Review of literature
Comin and Mulani (2006) model the
development of disembodied innovations
such as managerial and organizational
techniques, personnel, accounting and
work practices, and financial innovations.
These are very different from embodied
innovations in that the rents extracted by
the innovators are not associated to selling
the innovation per se.
This has some interesting implications.
First, the revenues accrued by the
innovator producer originate from the
increased efficiency in producing his good
or service with the innovation. If the
innovator-producer has some monopolistic
power in the market for his good or
service, the increased efficiency from
using the innovation in production yields
an increase in profits that may cover the
innovating costs. Second, since the
innovator-producer’s gain from innovating
comes from the increased efficiency of
production, the marginal private value of
developing disembodied innovations is
increasing in the value of the firm. In the
cross-section, firms with higher values
(resulting from larger sizes or ability to
charge higher markups) have more
incentives to develop disembodied
innovations. In the time series, shocks that
reduce the value of the firm reduce its
incentives to develop disembodied
innovations.
Nucci et al. (2005) have found out that
firms undertaking innovative activities
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Emperor International Journal of Finance and Management Research [EIJFMR] ISSN: 2395-5929
@Mayas Publication Page 17
typically hold a larger share of immaterial
assets and have a different capital
structure. Differences in the propensity to
innovate are likely to translate in different
TFP levels.
The authors have studied panel of firms to
study the relationship between firms’
capital structure and TFP. They identified
variations in financial structure which
were induced by factors that do not
directly affect the share of intangibles. The
authors were able to demonstrate a
negative relationship between leverage and
productivity, consistently with theories of
financial structure based on bankruptcy
costs, control rights and ‘equity holders-
debt holders’ conflicts.
Table:1
Total Factor Productivity Growth
S. no Name of Companies Coefficient P value
1 Aarti Steels Ltd. 0.00520795 0.257540517
2 Aditya Ispat Ltd. -0.01187376 0.064995361
3 Anil Special Steel Inds. Ltd. 0.00010592 0.820216672
4 Ashiana Ispat Ltd. 0.01536206 0.007524449
5 B P Alloys Ltd. 0.00181403 0.525020316
6 Balaji Galvanising Inds. Ltd. 0.00188558 0.517119364
7 Balaji Industrial Corpn. Ltd. -0.00151134 0.677077878
8 Bhoruka Steel & Services Ltd. -0.01043588 0.34401188
9 Bhushan Steel Ltd. 0.00337571 0.670135315
10 Bhuwalka Steel Inds. Ltd. 0.00828859 0.000454007
11 Ensa Steel Inds. Ltd. -0.01182857 0.009747266
12 Essar Steel Ltd. -0.00304334 0.25195426
13 Gangotri Iron & Steel Co. Ltd. -0.00032994 0.861520937
14 Gontermann-Peipers (India) Ltd. -0.00252679 0.212503432
15 Gopal Iron & Steels Co. (Gujarat) Ltd. -0.00305669 0.268152795
16 Graham Firth Steel Products (India) Ltd. 0.0057859 0.619696
17 Haryana Steel & Alloys Ltd. -0.0012397 0.724883896
18 Hisar Metal Inds. Ltd. 0.00226818 0.123021629
19 I P I Steel Ltd. -0.00142855 0.129980388
20 I S M T Ltd. 0.02570379 1.11519E-06
21 India Steel Works Ltd. 0.00011525 0.98469214
22 Indo-Germa Products Ltd. -0.00363602 0.686727168
23 Indore Steel & Iron Mills Ltd. -0.05301909 0.00200851
24 Kalyani Steels Ltd. -0.00136135 0.743813921
25 Mahindra Steel Service Centre Ltd. 0.02034899 0.350697623
26 Mahindra Ugine Steel Co. Ltd. 0.00269386 0.119730436
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Emperor International Journal of Finance and Management Research [EIJFMR] ISSN: 2395-5929
@Mayas Publication Page 18
27 Marmagoa Steel Ltd. 0.00089611 0.886514355
28 Modern Steels Ltd. 0.00088512 0.587717769
29 Mohan Steels Ltd. 0.00191748 0.818400846
30 Mukand Ltd. 0.00148023 0.083142058
31 Narbada Steels Ltd. 0.00199055 0.310904896
32 Prakash Industries Ltd. 0.00312357 0.522270868
33 Raajratna Metal Inds. Ltd. -0.00194484 0.299992729
34 Rashtriya Ispat Nigam Ltd. -0.00159147 0.468125827
35 Rathi Ispat Ltd. -0.04803606 0.014156277
36 Rathi Steel & Power Ltd. -0.00647271 0.412595292
37 Real Strips Ltd. 0.01184547 0.06747161
38 Shri Bajrang Alloys Ltd. 0.00091572 0.491500051
39 Steel Authority Of India Ltd. -0.0051192 0.0002432934
40 Steel Complex Ltd. -0.02322687 0.035990683
41 Steelco Gujarat Ltd. 0.00154038 0.526962334
42 Stelco Strips Ltd. 0.00123649 0.447605411
43 Tata Steel Ltd. 0.0033788 0.501082807
44 Tulsyan N E C Ltd. 0.04011219 0.001732184
45 Viraj Alloys Ltd. 0.00492551 0.247980981
Out of 45 steel companies, the TFP coefficients of 8 companies are significant at 5% level.
Out of these 8 companies, the TFP for three companies is positive and for the remaining five,
TFP coefficient is negative. It means approximately TFP is significant for approximately
18% of the companies. In totality for 19 companies out of 45, the TFP coefficients are
negative and for the remaining 26, the TFP coefficients are positive. It shows that for 42%
companies, TFP is negative and for remaining 58% companies the TFP is positive. The
results of TFP (steel) also reject our null
Hypothesis: H1C0: There is no productivity growth in steel industry.
NFA (Net Fixed Assets)
For NFA, we have taken the growth rate from semi log equations for the 20 years time period
(1991-2010) as shown in Table 2
where
Log NFA = Log of Net Fixed Assets
T = Time
The final value of NFA, for doing cross sectional analysis is given in Table 2
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Emperor International Journal of Finance and Management Research [EIJFMR] ISSN: 2395-5929
@Mayas Publication Page 19
Table: 2
Net Fixed Assets Growth
Name of
companies
NFA Name of
companies
NFA Name of
companies
NFA
Aarti Steels Ltd. 0.21910983 Graham Firth
Steel Products
(India) Ltd.
-0.0284923 Narbada
Steels Ltd.
-0.0199493
Aditya Ispat
Ltd.
0.22395988 Haryana Steel
& Alloys Ltd.
0.04450309 Prakash
Industries
Ltd.
0.12846417
Anil Special
Steel Inds. Ltd.
0.0949901 Hisar Metal
Inds. Ltd.
0.10231662 Raajratna
Metal Inds.
Ltd.
0.17775993
Ashiana Ispat
Ltd.
0.15229952 I P I Steel Ltd. 0.03741999 Rashtriya
Ispat Nigam
Ltd.
-0.0886902
B P Alloys Ltd. 0.06014869 I S M T Ltd. 0.17324302 Rathi Ispat
Ltd.
0.0126809
Balaji
Galvanising
Inds. Ltd.
0.07116529 India Steel
Works Ltd.
0.27299943 Rathi Steel &
Power Ltd.
0.21252461
Balaji Industrial
Corpn. Ltd.
-0.0273994 Indo-Germa
Products Ltd.
-0.0449596 Real Strips
Ltd.
0.13096594
Bhoruka Steel
& Services Ltd.
-0.0361676 Indore Steel &
Iron Mills Ltd.
-0.0254832 Shri Bajrang
Alloys Ltd.
0.03935492
Bhushan Steel
Ltd.
0.22442259 Kalyani Steels
Ltd.
0.04879476 Steel
Authority Of
India Ltd.
0.03678225
Bhuwalka Steel
Inds. Ltd.
0.10603932 Mahindra
Steel Service
Centre Ltd.
0.07001042 Steel
Complex
Ltd.
0.01097952
Ensa Steel Inds.
Ltd.
-0.0761675 Mahindra
Ugine Steel
Co. Ltd.
0.07412186 Steelco
Gujarat Ltd.
0.12037624
Essar Steel Ltd. 0.12038866 Marmagoa
Steel Ltd.
-0.015321 Stelco Strips
Ltd.
0.19566897
Gangotri Iron &
Steel Co. Ltd.
0.20990423 Modern Steels
Ltd.
0.07510049 Tata Steel
Ltd.
0.07986125
Gontermann-
Peipers (India)
Ltd.
0.05639408 Mohan Steels
Ltd.
0.08191684 Tulsyan N E
C Ltd.
0.18531943
Gopal Iron &
Steels Co.
(Gujarat) Ltd.
0.24383121 Mukand Ltd. 0.13515352 Viraj Alloys
Ltd.
0.06631214
Impact Factor.1.14
Emperor International Journal of Finance and Management Research [EIJFMR] ISSN: 2395-5929
@Mayas Publication Page 20
Limitations of the study
1. TFP is a single number so we have to
limit our study to Cross Section
analysis.
2. There have been gaps in the data, so
the treatment of data was difficult.
3. The sample size of industries is close
to 10 % of the available data in
‘Prowess’ due to gaps in data.
4. Panel data is best for the whole
exercise (including real and financial
variables), but it could not be done.
Suggestions
1. If the business environment favours
disembodied technological progress, it
allows the opportunity for costless
growth because TFP is a residual
which arises over a period of time
without any investment, either physical
or financial. An accounting approach
can never arrive at such a conclusion.
2. The firms need to recognize that the
choice of financial structure is not
uniquely determined by the financial
variables. It is determined by a
combination of financial and real
variables.
3. The residual growth due to TFP is a
source of finance which has hitherto
not been recognized. It leads to
synergies between financial
management, organizational
efficiency, technical efficiency,
diffusion of technology, best practices
in technology etc. that could then be
linked to long term finance.
4. Although all of these factors are given
and are found in certain firms but
finance theory has never recognized
such synergies.
5. One lesson learned is that the emphasis
on cost of capital in financing decision
is over emphasized, by which the
integration of finance with
productivity, efficiency and growth is
less understood.
6. The relationship between determinants
of financial structure and debt to equity
ratio is not straight forward. From our
analysis it is apparent that the same
determinants could behave differently
by either increasing debt or decreasing
equity. Similarly the same
determinants could have different
implications in different industries.
Conclusion
From this study we have understood that
finance is not an end in itself; rather
productivity, technological progress and
efficiency contribute to the growth of the
firms significantly. This thesis considers
the relationship between financial
structure, financial variables and
productivity, through real variables like
TFP growth, technology growth, capital
growth etc. We have found that financial
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Emperor International Journal of Finance and Management Research [EIJFMR] ISSN: 2395-5929
@Mayas Publication Page 21
structure is caused by productivity. We can
no longer say that financial structure is
uniquely determined by financial variables
alone. On the basis of the results of
cement, pharmaceutical and steel
industries, we can conclude that
productivity influences financial structure.
We have also noticed productivity growth
in cement and pharmaceutical industry but
not in steel industry because of the
variation due to different variety, scale and
technical coefficients. Therefore, in the
case of steel industry the variation is large.
Hence in comparison to the other two
industries, i.e. cement and pharmaceutical,
we have seen that the coefficients of steel
industry are not statistically significant.
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