Equity Markets in India (eBook)

Shveta Singh is an Associate Professor of Finance at the Department of Management Studies, Indian Institute of Technology (IIT Delhi), India. She teaches courses like managerial accounting and financial management, Indian financial system and security analysis, and portfolio management. Recently, she has developed a course on Corporate Governance and has also received training by the International Finance Corporation (IFC) in collaboration with the Indian Institute of Corporate Affairs (IICA), for the same. She has contributed to various consulting assignments for organizations like the Directorate General of Supplies & Disposals (DGS&D) and the National Buildings Construction Corporation (NBCC). She has published research papers in journals of national and international repute. She has co-authored a research monograph titled "Financial Management Practices: An Empirical Study of Indian Corporates" (Springer, 2013). She has won many awards including the “Literati” award for outstanding research by Emerald Publishing Inc.P.K. Jain is a Professor of Finance at the Department of Management Studies, IIT Delhi. He holds a PhD in finance from Delhi School of Economics, University of Delhi. He earlier served as the Co-ordinator of Dalmia Research Programme on Management in Asia. He was the Modi Foundation Chair Professor. He has a teaching experience of more than 40 years in subjects related to management accounting, financial management, financial analysis, cost analysis and cost control. His research is primarily focused in the area of corporate finance. He has authored/co-authored more than 11 textbooks and 14 research books /monographs. An empiricist, he investigates applied problems using real-business data to have the managerial implications of various financial aspects. He has published more than 160 research papers in journals of national and international repute. Recently, his paper on “Capital Budgeting Decisions: Evidence from India” has been adjudged with the “Literati Award” by Emerald for Outstanding Excellence in Research. He has also received the Distinguished Alumni Award from Shri Ram College of Commerce, Delhi University. He has also presented research papers in nearly three dozen conferences held in India and abroad; and many of them have been published in the conference proceedings. He is on the Board of academic institutions and reviewer of journals like, Vision, Abhigyan, Vikalpa, Finance India, Management and Change. He has been visiting faculty at the International Centre for Promotion of Enterprises Ljubljana, Slovenia for more than a decade. He has been conferred best teacher award by IIT Delhi in January 2012. In July 2012, he has also been conferred 3rd Asia’s Best B-School Awards entitled ‘Best Professor in Financial Management’ (in Singapore) by World Education Congress and CMO Asia as well as 'Best Teacher in Financial Management' (at Mumbai) by Amar Ujala (in November, 2012).Surendra S. Yadav is currently a Professor and former Head of the Department of Management Studies, IIT Delhi. He teaches corporate finance, international finance, international business, and security analysis & portfolio management. He has been a visiting professor at University of Paris, Paris School of Management and Inseec Business School, Paris, France, and University of Tempa, USA. He  has published fourteen books. He has contributed more than one hundred thirty papers in research journals and about six dozen papers in conferences/seminars. He has contributed more than thirty articles in financial/economic newspapers. He has undertaken several sponsored research and consultancy projects for the industry and the government. Prof. Surendra S. Yadav is the editor-in-chief of the Journal of Advances in Management Research (JAMR), published by Emerald, UK, in collaboration with IIT Delhi.

Preface 7
Acknowledgements 8
Contents 10
About the Authors 14
Abbreviations 14
List of Figures 19
List of Tables 20
List of Annexures 23
1 Introduction 24
Section I: Literature Review 25
Equity Market Studies 25
Factors Affecting Returns 28
Section II: Objectives 29
Section III: Research Methodology 30
Scope 31
NSE 500 Index Background 31
Secondary Data and Analysis 32
Data Analysis 34
Section IV: Layout of the Study 35
Section V: Summary 38
Annexure 1.1: Constituent Companies and Sectors of NSE 500 (as on 11 March 2013) 39
References 51
2 Rates of Return on Equity Funds (ROEF)—Corporates’ Perspective 56
Introduction 56
Section I: Literature Review 57
Risk Factors/Determinants Affecting ROE 57
Impact of Recent Financial Crisis on India 57
Section II: Scope, Data and Methodology 58
Scope 58
NSE 500 Index Background 59
Secondary Data and Analysis 59
Individual Companies and Portfolios 59
Definition of ROEF 59
Initial Public Offering (IPO) Adjustment 60
Data Sources and Analysis 61
Section III: Rates of Return from the Company’s Perspective—ROEF 61
Section IV: Summary 65
References 66
3 Expected Rates of Return 67
Introduction 67
Section I: Literature Review 68
Section II: Scope, Data and Methodology 72
Scope 72
NSE 500 Index Background 72
Secondary Data and Analysis 73
The CAPM Model 73
Deployment of the CAPM 73
Cost of Equity (Ke) or Expected Rates of Return on Equity Shares 73
DOL and DFL 74
Data Sources and Analysis 74
Section III: Expected Rates of Return Based on Capm 74
Section IV: Expected Rates of Return—Cost of Equity 77
Section V: Summary 83
References 83
4 Rates of Return—Investors’ Perspective 87
Introduction 87
Section I: Literature Review 88
Factors Affecting Returns 88
Behaviour of Share Prices 90
Section II: Scope, Data and Methodology 92
Scope 92
NSE 500 Index Background 92
Secondary Data and Analysis 93
Focus on Long-Term Returns 93
Individual Companies and Portfolios 93
Holding Periods 94
Share Prices 94
Definition of Returns 94
Bonus and Rights Issue Adjustments 95
Weights for Computing Portfolio Returns 95
Dividends 96
Transaction Costs and Taxes 96
Data Sources and Analysis 96
Section III: Portfolio Returns for Varied Holding Periods 96
Section IV: Overall Characteristics of Returns 101
Periods of High Returns 103
Periods of Low Returns and Losses 103
Magnitude of Variations 104
Three Phases 104
Two Components of Total Return 104
Declining Importance of Dividend 104
Comparison with Debt Instruments 105
a. Long-Term Returns’ Comparisons 105
b. Short-Term Returns’ Comparison 106
Section V: Concluding Observations 108
Annexure 4.1 109
Example of Bonus Share Adjustment 109
Example for Rights Issue Adjustment 111
References 111
5 Rates of Return—Disaggregative Analysis 114
Section I: Introduction 114
Age 115
Size 115
Ownership Structure 115
Underlying Sector/Industry Affiliation 117
Section II: Literature Review 117
Section III: Methodology 118
Scope 118
NSE 500 Index Background 119
Secondary Data and Analysis 119
Individual Companies and Disaggregated Portfolios 119
Share Prices 119
Definition of Returns 120
Bonus and Rights Issue Adjustments 120
Weights for Computing Portfolio Returns 121
Dividends 121
Transaction Costs and Taxes 121
Data Sources and Analysis 121
Age 122
Size 122
Ownership Structure 123
Underlying Sector/Industry Affiliation 123
Section IV: Returns Based on the Age, Size, Ownership Structure and Underlying Sector/Industry Affiliation of Sample Companies 126
Age 126
Size 130
Ownership Structure 134
Underlying Sector/Industry Affiliation 134
Section V: Summary 134
References 145
6 Analysis of Price Multiples 147
Introduction 147
Section I: Literature Review 148
Section II: P/E Ratios in India 149
Interpreting the P/E Ratio: A Word of Caution 150
Earnings Per Share (EPS) 150
Relationship Between EPS and Prices 151
P/B Ratio 151
Section III: Scope, Data and Methodology 151
Scope 152
NSE 500 Index Background 152
Secondary Data and Analysis 152
Definition of P/E Ratios 152
Computation of P/E Ratios 153
Computation of P/B Ratios 153
Computation of EPS Growth 153
Data Sources and Analysis 153
Section IV: Price Multiples 153
Section V: Summary 162
References 162
7 Volatility in Stock Returns 164
Introduction 164
Section I: Literature Review 164
International Studies on Behaviour of Returns 165
Indian Studies on Behaviour of Returns 167
Section II: Scope, Data and Methodology 167
Scope 167
NSE 500 Index Background 168
Secondary Data and Analysis 168
Methodology 169
Formulation of Hypotheses 171
Section III: Index Returns and Their Statistical Treatment 172
Section IV: Summary 175
Annexure 7.1: Glossary of Terms 175
Annexure 7.2: Ljung-Box Q2 Statistics 176
Annexure 7.3: Lagrange Multiplier Test 176
Annexure 7.4: Stationarity Test Statistics 177
References 177
8 Level of Market Efficiency Using ‘Rational Bubbles’ Approach 180
Section I: Introduction 181
Section II: Literature Review 181
Rational Bubbles 181
Share Price Changes 183
Section III: Methodology 184
Scope 184
NSE 500 Index Background 185
Secondary Data and Analysis 185
Share Prices 185
Dividends 186
Transaction Costs and Taxes 186
Tests for Existence of Rational Bubbles 186
Data Analysis 186
Section IV: Statistical Models Used to Test the Presence of ‘Rational Bubbles’ 187
Unit Root Test 188
Tests for Cointegration 189
Section V: Results and Discussion 191
Unit Root Test 191
Threshold Autoregressive (TAR) Test 192
Momentum-Threshold Autoregressive (M-TAR) Test 192
M-TAR Error Correction Model 192
Section VI: Summary 193
Annexure 8.1: Brief Definition of Theories and Terms 194
Annexure 8.2: Augmented Dickey–Fuller (ADF) Test Results 195
Annexure 8.3: Results of TAR Cointegration Test 195
Annexure 8.4: Estimation Results of M-TAR Error Correction Model (ECM) 195
Annexure 8.5: Summary and Diagnostic Checking for M-TAR Models (1 and 2) 196
Annexure 8.6: Granger Causality and Path Asymmetry Test 196
Annexure 8.7: Engle–Granger Test Results 196
Annexure 8.8: ARDL Bound Test Results 197
Annexure 8.9: Johansen–Juselius Test Results 197
References 197
9 Concluding Observations 200
Section I: Returns on Equity 201
Section II: Analysis of Price Multiples 204
Section III: Risk/Volatility in Returns 205
Section IV: Level of Market Efficiency 205
Section V: Summary 207
References 208