Investment sensitivity and managerial decision making behaviour of Indian firms
Contemporary models of the financial theory support the proposition that the stock prices should be fundamentally a reflection of the discounted value of earnings. Accordingly the investors and analysts should base their expectations on the expected future cash flows that are logically correlated or...
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| Format: | Article |
| Language: | English |
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Mendel University Press
2013-01-01
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| Series: | Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis |
| Subjects: | |
| Online Access: | https://acta.mendelu.cz/61/7/2157/ |
| _version_ | 1818321570790113280 |
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| author | Pankaj Kumar Gupta Jasjit Bhatia |
| author_facet | Pankaj Kumar Gupta Jasjit Bhatia |
| author_sort | Pankaj Kumar Gupta |
| collection | DOAJ |
| description | Contemporary models of the financial theory support the proposition that the stock prices should be fundamentally a reflection of the discounted value of earnings. Accordingly the investors and analysts should base their expectations on the expected future cash flows that are logically correlated or have a carry over effect vis-ŕ-vis present stream of cash flows. This logically implies that the managers would have an incentive to manipulate investor’s expectation of future cash flows. The zeal to maximize the firm’s value based on market capitalization is expected to have a detrimental effect on the investment decisions leading to sub optimality. Given the imperfect information structure and market pressures, the Indian firms suffer from mispricing and as such the conventional robust theoretical models of agency conflicts cannot be refuted. This motivates us to examine the interrelation ship between the concerns for valuation and investment sensitivity. We use a sample statistics of selected listed firms that represent the CNX Nifty Index and test for the dependence of the investment behavior of the firm, on the sensitivity of the firms’ share prices to its current cash flow represented by surprise earings. We use the earnings response coefficient (ERC) framework proposed by Ball and Brown (1968) for 11 key industries in India. We find that the surpise in accounting earnings announcements is negatively associated with abnormal stock returns and the investment decisions taken by the firms are negatively sensitive to changes in investment opportunities. |
| first_indexed | 2024-12-13T10:43:01Z |
| format | Article |
| id | doaj.art-2844fec442a04175a0c241924fc3e4c2 |
| institution | Directory Open Access Journal |
| issn | 1211-8516 2464-8310 |
| language | English |
| last_indexed | 2024-12-13T10:43:01Z |
| publishDate | 2013-01-01 |
| publisher | Mendel University Press |
| record_format | Article |
| series | Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis |
| spelling | doaj.art-2844fec442a04175a0c241924fc3e4c22022-12-21T23:50:23ZengMendel University PressActa Universitatis Agriculturae et Silviculturae Mendelianae Brunensis1211-85162464-83102013-01-016172157216210.11118/actaun201361072157Investment sensitivity and managerial decision making behaviour of Indian firmsPankaj Kumar Gupta0Jasjit Bhatia1Centre for Management Studies, Jamia Millia Islamia, New Delhi (India)Research Scholar, Centre for Management Studies, Jamia Millia Islamia, New Delhi (India)Contemporary models of the financial theory support the proposition that the stock prices should be fundamentally a reflection of the discounted value of earnings. Accordingly the investors and analysts should base their expectations on the expected future cash flows that are logically correlated or have a carry over effect vis-ŕ-vis present stream of cash flows. This logically implies that the managers would have an incentive to manipulate investor’s expectation of future cash flows. The zeal to maximize the firm’s value based on market capitalization is expected to have a detrimental effect on the investment decisions leading to sub optimality. Given the imperfect information structure and market pressures, the Indian firms suffer from mispricing and as such the conventional robust theoretical models of agency conflicts cannot be refuted. This motivates us to examine the interrelation ship between the concerns for valuation and investment sensitivity. We use a sample statistics of selected listed firms that represent the CNX Nifty Index and test for the dependence of the investment behavior of the firm, on the sensitivity of the firms’ share prices to its current cash flow represented by surprise earings. We use the earnings response coefficient (ERC) framework proposed by Ball and Brown (1968) for 11 key industries in India. We find that the surpise in accounting earnings announcements is negatively associated with abnormal stock returns and the investment decisions taken by the firms are negatively sensitive to changes in investment opportunities.https://acta.mendelu.cz/61/7/2157/investment behaviorearnings response coefficientimperfect informationinvestment sensitivity |
| spellingShingle | Pankaj Kumar Gupta Jasjit Bhatia Investment sensitivity and managerial decision making behaviour of Indian firms Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis investment behavior earnings response coefficient imperfect information investment sensitivity |
| title | Investment sensitivity and managerial decision making behaviour of Indian firms |
| title_full | Investment sensitivity and managerial decision making behaviour of Indian firms |
| title_fullStr | Investment sensitivity and managerial decision making behaviour of Indian firms |
| title_full_unstemmed | Investment sensitivity and managerial decision making behaviour of Indian firms |
| title_short | Investment sensitivity and managerial decision making behaviour of Indian firms |
| title_sort | investment sensitivity and managerial decision making behaviour of indian firms |
| topic | investment behavior earnings response coefficient imperfect information investment sensitivity |
| url | https://acta.mendelu.cz/61/7/2157/ |
| work_keys_str_mv | AT pankajkumargupta investmentsensitivityandmanagerialdecisionmakingbehaviourofindianfirms AT jasjitbhatia investmentsensitivityandmanagerialdecisionmakingbehaviourofindianfirms |