15

CHAPTER 2 – RESEARCH METHODOLOGY

2.1 INTRODUCTION:

This study is focused at finding the relevance of the select corporate finance theories and their

efficacy in the present context. For the compilation of this study, the data, in the dorm of

seminal research papers has been considered. This data is a secondary data. The major

objective is to see the relevance of select corporate finance theories and to find whether a re-

look at them is necessary? Data Collection is in the form of documents (Seminal Research

Papers) and findings are comprehensive. All these are the characteristics of a qualitative

research. Such type of study is a type of qualitative research and this work of research is also a

qualitative research.

2.2 TYPES OF RESEARCH –

Research can be broadly be categorized as Qualitative Research or Quantitative Research.

In qualitative research, research methods involves describing a specific situation using various

research tools such as Interviews, Surveys and observations are extensively used. The

emphasis in qualitative research is on gathering verbal data and not on collecting

measurements.

Where as in quantitative research, as name says requires quantifiable data involving numerical

and statistical explanations. Quantitative research analysis hinges on researchers assumptions

and understanding inherent within different statistical models. Numerical data and information

is generated which may be quantified in numbers.

Creswell (1998) defines qualitative study as:

 16

“Qualitative research is an inquiry process of understanding based on distinct

methodological traditions of inquiry that explore a social or human problem.

The researcher builds a complex, holistic picture, analyzes words, report detailed views of

informants, and conducts the study in a natural setting.”

One should not form an opinion about qualitative research as an substitute for “Statistical” or

Quantitative study. It demands a commitment to the time, engagement in complex, time

consuming process of data analysis, writing passages and participation in a form of social and

human science research that does not have firm guideline or specific procedures and is

evolving and changing constantly.

Reasons for conducting qualitative research can be cited as follows :

This research is based on “World View” which is holistic and has following beliefs

1. There is no single entity.

2. Reality based upon perception that may be different for each person and may change

over time.

3 .What we know has meaning only within a given situation or context.

Qualitative research demands strong rationale.

Topics to be explored- This is a situation where variables cannot be easily identified. Theories

are not available to explain the behavior.

A distant panoramic view is not enough to present the answers to the problems.

Joubish et al., (Muhammad Farook Joubish, Muhammad Ashraf Khurram,Aijaj

Aahmed,Syeda Tasneem Fatima and Kamal Haider, 2011) said, Qualitative research is

concerned with developing explanations of social phenomenon. It tries To receive the answers

of the following questions as :

Why people behave the way they do?

How Opinions and attitudes are formed?

 17

Creswell (J W Creswell, 1994) has divided qualitative research into five different types

1. Case Study

2. The Biography

3. Ethnography

4. Phenomenology

5. Grounded Theory

These are elaborated as below :-

1. Case Study

Creswell (1998) defines a case study as an exploration of a “bounded system” or a case (or

multiple cases) over time through detailed, in-depth data collection involving multiple sources

of information rich in context. Some consider “the case” as an object of study (e.g., Stake,

1995) while others consider it a methodology (e.g., Merriam, 1998). According to Creswell,

the bounded system is bounded by time and place, and it is the case being studied – a

program, an event, an activity, or individuals.

The Case Study method to conduct study is used as

The researcher needs to situate the case in a context or setting. The setting may be a physical,

social, historical, and/or economic. The researcher needs to identify the focus of the study. It

could be either on the case (intrinsic study), because of its uniqueness, or it may be on an

issue or issues (instrumental study), with the case used instrumentally to illustrate the issue. A

case study could involve more than one case (collective case study). In choosing what case

to study, a researcher may choose a case because it shows different perspectives on the

problem, process, or event of interest, or it may be just an ordinary case, accessible, or

unusual. The data collection is extensive, drawing on multiple sources of information such

as observations, interviews, documents, and audio-visual materials. The data analysis can be

either a holistic analysis of the entire case or an embedded analysis of a specific aspect of the
 18

case. From the data collection, a detailed description of the case is done. Themes or issues

are formulated and then the researcher makes an interpretation or assertions about the case.

When multiple cases are chosen, a typical format is to provide a detailed description of each

case and themes within the case (called within-case analysis), followed by a thematic analysis

across the cases (called a cross-case analysis), as well as assertions or an interpretation of the

meaning of the case.

In the final stage, the researcher reports the “lessons learned” from the case (Lincoln and

Guba, 1985).

The Case Study method faces following Challenges

The researcher needs to identify his/her case among a host of possible candidates.

The researcher needs to decide whether to study a single case or multiple cases. The

motivation for considering many cases is the issue of generalizability, which is not so much of

a pressing issue in qualitative inquiry. Studying more than one case runs the risk of a diluted

study, lacking the “depth” compared to a single case. “How many” cases becomes a

challenge then. Getting enough information to get a good depth for the case is a challenge.

Deciding on the boundaries in terms of time, events and processes may be challenging. Some

cases have no clean beginning and ending points.

The analysis of qualitative data is not an easy task. All the qualitative studies show uniqueness

and hence unique strategies are employed to analyze the data.

Qualitative analysis is a broad field of enquiry and it uses unstructured data collection

methods.

2.The Biography- This is a study of an individual and his / her experiences as told to the

researcher or as found in the achieves. It begins with an objective set of experiences in the

subject’s life, noting life course stages and experiences. The life course stages may be
 19

childhood, adulthood, or old age, written in a chronology, or experiences such as education,

marriage, and employment.

Next, the researcher gathers concrete contextual biographical material using interviewing.

Here, the researcher focuses on gathering stories as the subject recounts a set of life

experiences in the form of a story or narrative.

The researcher then organizes the stories around themes that indicate epiphanies (i.e.,

pivotal events) in the subject’s life.

The researcher explores the meanings of these stories. However, the researcher relies on

the individual to provide explanations and then searches for multiple meanings. In addition,

the researcher looks for larger structures to explain the meanings, and provides an

interpretation for the life experiences of the individual. The larger structures could be social

interactions in groups, cultural issues, ideologies and historical context. If more than one

individual is studied, cross-interpretation can be done.

Biography as a type of qualitative research has following challenges:

The information gathering from and about the subject is usually very extensive and

demanding. There is the need to have a clear understanding of the history and context to

enable one to position the subject within the larger trends in society or in the culture.

It takes a keen eye to determine the particular stories, slant, or angle that “works” in

writing a biography and to uncover the “figure under the carpet” (Edel, 1994) that explains the

multilayered context of a life. The researcher needs to be able to bring himself/herself into the

narrative and to acknowledge his or her standpoint, since this is an interpretive research.

3.Ethnography is a description and interpretation of a cultural or social group or system

(Creswell, 1998). In such a study, the researcher examines the group’s observable and learned

patterns of behavior, customs, and ways of life (Harris, 1968). Here, the researcher becomes a

participant observer, and gets immersed in the day-to-day lives of the people or through one-
 20

on-one interviews with members of the group. The researcher focuses on the meanings of

behavior, language, and inter-actions of the culture-sharing group.

The following procedure is followed in Ethnography

The research begins with the researcher looking at people in interaction in ordinary settings

and attempting to discern pervasive patterns such as life cycles, events, and cultural themes.

To establish patterns, the ethnographer engages in extensive work in the field (field work),

gathering information through observations, interviews, and materials helpful inn developing

a portrait and establishing “cultural rules” of the culture-sharing group. The researcher is

sensitive to gaining access to the field through gatekeepers. The ethnographer locates key

informants, i.e., individuals who provide useful insights into the group and can steer the

researcher to information and contacts. The researcher is also sensitive about reciprocity

between the investigator and the subjects being studied, so that something will be returned to

the subjects being studied in exchange for their information. Lastly, the researcher is also

sensitive to reactivity, the impact of the researcher on the site and the people being studied.

The researcher also makes every effort to make his/her intent known from the start to avoid

any trace of deception. The researcher then does a detailed description of the culture-sharing

group or individual, an analysis by themes or perspectives and some interpretation for

meanings of social interaction and generalizations about human social life.

Ethnography faces following challenges:

The researcher needs to have grounding in cultural anthropology and the meanings of social-

cultural systems as well as the concepts typically explored by ethnographers. The time to

collect data is extensive, involving prolonged time in the field. The style of writing, literary

(almost story telling approach), may limit audience and may be challenging for some authors

who are used to traditional approaches of writing social science research. There is the
 21

possibility that the researcher would “go native” and be unable to complete the study or be

compromised in the study.

4.Phenomenology- Is phenomenological study describes that meaning of the lived

experiences for several individuals about a concept or a phenomenon (Creswell, 1998). As

noted by Polkinghorne (1989), phenomenology explores the structures of consciousness in

human experiences.

The study is conducted as-The researcher writes research questions that explore the meaning

of lived experiences for individuals, and asks individuals to describe these experiences. The

researcher then collects data, typically via long interviews, from individuals who have

experienced the phenomenon under investigation. The data analysis involves

Horizontalization (i.e., extracting significant statements from transcribed interviews). The

significant statements are then transformed into clusters of meanings according to how each

statement falls under specific psychological and phenomenological concepts. Finally, these

transformations are tied together to make a general description of the experience – both the

textural description (of what was experienced) and the structural description (of how it was

experienced).

The researcher can incorporate his/her personal meaning of the experience here. Finally, the

report is written such that readers understand better the essential, invariant structure of the

experience (or essence) of the experience. The reader should come away with the feeling that,

“I understand better what it is like for someone to experience that.” (Polkinghorne, 1989).

Phenomenology has following challenges:

The researcher requires a solid grounding in the philosophical precepts of

Phenomenology. The subjects selected into the study should be individuals who have actually

experienced the phenomenon. The researcher needs to bracket his/her own experiences, which
 22

is difficult to do. The researcher needs to decide as to how and when his/her personal

experiences will be incorporated into the study.

5.Grounded Theory

The intent of grounded theory is to generate or discover a theory – an abstract analytical

schema of a philosophy that relates to a particular situation. This situation could be one in

which individuals interact, take actions, or engage in a process in response to a phenomenon

(Creswell, 1998).

The methodology of conducting the study is like this- In open coding, the researcher forms

initial categories of information about the phenomenon being studied by segmenting

information. Within each category (a category represents a unit of information composed of

events, happenings and instances), the researcher finds several properties, or subcategories,

and looks for data to dimensionalize, or show the extreme possibilities on a continuum of, the

property.

In axial coding, the researcher assembles the data in new ways after open coding. The

researcher presents this using a coding paradigm or logic diagram in which he/she identifies a

central phenomenon, explores causal conditions (i.e., categories of conditions that influence

the phenomenon), specifies strategies (i.e., the actions or interactions that result from the

central phenomenon), identifies the content and intervening conditions (i.e., the narrow and

broad conditions that influence the strategies), and delineates the consequences (i.e., the

outcomes of the strategies) for this phenomenon.

In selective coding, the researcher identifies a “story line” and writes a story that

integrates the categories in the axial coding model. In this phase, conditional propositions

(or hypotheses) are typically presented.

Finally, the researcher develops and visually portrays a conditional matrix that

elucidates the social, historical, and economic conditions influencing the central
 23

phenomenon. This process results in a theory, written by the researchers close to a specific

problem or population of people.

Following are the challenges of Grounded theory: The researcher has to set aside as much

as possible, theoretical ideas or notions so that analytical, substantive theory can emerge.

Despite the evolving, inductive nature of this form of qualitative enquiry, researcher must

recognize that this is a systematic approach to research with specific steps in data analysis.

2.3 METHODS OF QUALITATIVE DATA ANALYSIS:

There are 15 methods of data analysis in qualitative research. They are as given below

1. Taxonomic Analysis

2. Typological System

3. Constant Comparison / Grounded Theory

4. Case Study Analysis

5. Ethno-Statistics

6. Logical Analysis / Matrix Analysis

7. Phenomenological

8. Event Analysis

9. Analytic Induction

10. Hermeneutical Analysis

11. Semiotics

12. Discourse Analysis

13. Narrative Analysis

14. Content Analysis

15. Domain Analysis

 24

1. Taxonomic Analysis : this is the search for the way that the cultural domains are

organized. It involves drawing of graphical interpretation of ways in which individual

participants move. This analysis is useful in understanding the knowledge creation and

utilization.

2. Typological system: it is study of systems which may refer to culture, language,

personality etc.

3. Grounded Theory (GT): This method was developed by two sociologists Barney

Glaser and Anselm Strauss. This is a systematic methodology in social sciences

involving the discovery of theory through the analysis of data. This research method

operates almost in a reverse fashion from traditional social science research. Rather

than beginning with the hypothesis, here the first step is data collection. From data

collected the key points are marked with series of codes which are extracted from the

text. Such codes are grouped into similar concepts in order to make the data more

workable. From these concepts categories are formed which are the basis of creation of

a theory. ALL IS DATA is fundamental property of GT, which means everything that

gets the researcher’s way when studying a certain area is data.

4. Case study Analysis: In this method analysis of persons, events, decisions, periods,

projects, policies, institutions or other systems are studied.

5. Ethno-Statistics: this is an empirical study of how professional scholars use statistics

to construct numbers in scholarly research.

6. Matrix Analysis: this is study of matrices and their algebraic properties.

7. Phenomenological: Interpretative Phenomenological Analysis (IPA) is psychological

research with ideographic focus, which means it aims to offer insights into how a

given person, in given context, makes sense to a given phenomenon.

 25

8. Event Analysis: the analysis of a specific event is done, as the name indicates. This is

useful for knowing the cause of an event and taking curative action, if needed. Besides

it is useful in training as well.

9. Analytic Induction: this refers to systematic examination of similarities between

various social phenomenons in order to develop a concept or ideas.

10. Hermeneutical Analysis: hermeneutics is the theory of text interpretation. Specifically

interpretation of biblical text, wisdom literature and philosophical text. It is a wider

discipline which includes written, verbal and non verbal communication.

11. Semiotics: this is a study of meaning making, philosophical theory of signs and

symbols.

12. Discourse Analysis: is a term used for number approaches to analyze written, vocal or

sign language.

13. Narrative Analysis: this is a study of text, stories, biographies, journals, field notes,

letters, conversations, interviews, and family stories, photos to analyze and understand

why people create meaning in their lives.

14. Content Analysis: this is analysis of text of various type including writing, images,

recordings, cultural artifacts. This is used for theory building, testing of hypotheses

and evaluation research.

15. Domain Analysis: this produces domain models using domain specific languages,

feature tables, generic architecture which describes all the systems in a domain.

For the study this researcher has made use of Grounded Theory because in Grounded Theory,

the researcher forms initial categories of information about the phenomenon being studied by

segmenting information. Within each category (a category represents a unit of information

composed of events, happenings and instances), the researcher finds several properties, or
 26

subcategories, and looks for data to dimensionalize, or show the extreme possibilities on a

continuum of, the property. Along with the Grounded Theory, the tool of Content Analysis

has been extensively used for the purpose of this study.

2.4 NORMATIVE STATEMENTS AS DATA:

In particular, the researcher has focused on the following content in the existing Corporate

Finance literature as Normative Statements to be formed as part of the basis for his research

work.

Table No: 1

Normative Statements for Financing Decisions Theory / Approach / Concept

No

FD-1 Smaller Firms rely on Rule of thumb rather than, the Ad hoc Approach

discounted cash flow methods.

FD-2 Agency costs and asymmetric information as well as Agency Cost Theory

corporate control considerations seem to affect the

capital structure of firms.

FD-3 External Financing issuing debt is better than Agency Cost Theory

issuing stock, when the managers have superior

information.

FD-4 Entrenchment has no effect on Leverage. Agency Cost Theory

FD-5 Asymmetries in information leads the firms to Asymmetric Information

under-invest due to problems in communication the

credibility to outsiders.

FD-6 Firms systematically adjust their Capital Structure to symmetric Information

 27

the target level.

FD-7 Asymmetric Information regarding firms prospects Asymmetric Information

causes dilution leading to adverse selection and

insufficiencies in market.

FD-8 Banks finance themselves with Deposits only Bankruptcy Cost Theory

Specialize in lending to one sector

FD-9 CAPM usually assumes either that the returns on CAPM

assets are normally distributed or that investors have
quadratic utility functions.
FD-10 Cost of Debt would be uniform irrespective of the Cost of Capital

size of the Firm.

FD-11 Large, Liquid, Profitable firms with low distress Cost of Capital

costs use debt conservatively.

FD-12 The distribution of holding the Debt and Equity is Debt Equity Ratio

not Country Specific.

FD-13 The Firm always Selects its Optimal Debt Equity Debt Equity Ratio

ratio to minimize its Weighted Average Cost of

capital irrespective of the Risk attitude of the firm.

FD-14 The target Debt-Equity ratio changes over time as, Debt Equity Ratio

firms profitability and Stock price Changes.

FD-15 Equity Ratio is directly correlated with the Value of Debt Equity Ratio

the Firm.

FD-16 There is a Strong relationship between Debt Ratio Debt Equity Ratio

and ROA.
 28

FD-17 The efficient markets hypothesis holds that a market Efficient Market Hypothesis

is efficient if it is impossible to make economic

profits by trading on available information.

FD-18 Evidence for efficient markets model is extensive. Efficient Market Hypothesis

FD-19 Development of Modern Capital Market Theory has Financing Decisions

empirical evidence.

FD-20 Shareholders have an incentive to substitute 'Risky' Financing Decisions

for 'Less Risky' operating and Investment policies.

FD-21 Stock prices decline due to wealth transfers to from Financing Decisions

current stockholders to purchasers of new

convertible Debt, can be empirically explained.

FD-22 Significant negative abnormal returns accrue on Financing Decisions

average to common stockholders of the firms

offering new offerings of convertible and straight

debt.

FD-23 Firms Borrow more to invest in Structures than in Financing Decisions

Equipments
 29

FD-24 The Financial Markets and Capital Markets are Financing Decisions

independent.

FD-25 Financing and Investment Decisions are in general, Financing Decisions

independent.

Normative Statements for Financing Decisions

FD-26 Small Recapitalization cost would lead to wide Financing Decisions

swings in firm's Debt Ratio , overtime.

FD-27 Increase in average level of indebtedness across Financing Decisions

firms may cause the economy to become more

vulnerable macroeconomic Shocks.

FD-28 Assets with high liquidation Costs lead the firms to Financing Decisions

choose Capital Structure that makes Financial

Distress Less likely.

FD-29 Theoretical underpinnings of observed correlations Financing Decisions

are largely resolved.

FD-30 Profitability is negatively related to leverage. Financing Decisions

FD-31 Tangibility, Size , Profitability and Growth Financing Decisions

opportunity are the Consistent Variables for Capital

Structure.
 30

FD-32 The relationship between Capital Structure and Financing Decisions

Profitability of a firm cannot be established

Normative Statements for Financing Decisions

FD-33 Debt and Lease contracts are independent. Financing Decisions

FD-34 Increase in lease Financing has no effect on the Financing Decisions

Optimal Leverage Ratio.

FD-35 Leverage and Debt maturities are independent of Financing Decisions

macroeconomic factors.

FD-36 Capital Structure and Dividend payment is Financing Decisions

independent.

FD-37 F D I have no correlation with the maturity period of Financing Decisions

Debt.

FD-38 Cost of capital and value of firm do not change with Financial Performance

a change in leverage. Management

FD-39 Firms use their investment in fixed assets as a Financial Performance

strategic variable to affect profitability. Management

FD-40 Change in Capital Structure and Value of the firm Financial Performance

are Correlated. Management

 31

Normative Statements for Financing Decisions

FD-41 As the degree of leverage increases, the ratio of less M M Approach

expensive source of funds (debts) increases; while

that of equity (involving higher cost) decreases.

FD-42 The investors (arbitragers) are able to substitute M M Approach

personal or homemade leverage for corporate

leverage.

FD-43 The relationship between a firm's debt level and that M M Approach

of its industry does not appear to be of concern to

the market.

FD-44 The expected future financial deficit is a significant M M Approach

determinant of the current choice of debt versus

equity, and profitable firms have higher target

leverage.

FD-45 Firms would issue as much secured debt as possible. M M Approach

FD-46 The firm's leverage is independent of the industry. M M Approach

FD-47 Value of Debt is relatively insensitive to firm's M M Approach

performance.

FD-48 The Capital Structure is dynamic and the persistent M M Approach

of leverage changed over the period of time.

 32

FD-49 Threat of Hostile takeover motivates Managers to Mergers & Acquisition

avail Debt, which otherwise they would not have

availed.

FD-50 Capital structure is relevant, as a change in it will N I Approach

lead to a corresponding change in the cost of capital

and the total value of the firm.

FD-51 Capital structure is irrelevant, as an increase in the N O I Approach

proportion of debt would lead to increased financial

risk of shareholders, who would expect higher rate

of return.

FD-52 When firms which issue debt are moving toward the N O I Approach

industry average from below, the market will react

more positively than when the firm is moving away

from the industry average.

FD-53 The currently popular real business cycle paradigm N O I Approach

proceeds under working hypothesis that financial

structure is irrelevant.

FD-54 Capital structure is relevant, as a change in it will N I Approach

lead to a corresponding change in the cost of capital

and the total value of the firm.

FD-55 Capital structure is irrelevant, as an increase in the N O I Approach

proportion of debt would lead to

Increased financial risk of shareholders, who would

expect higher rate of return.

FD-56 When firms which issue debt are moving toward the N O I Approach
 33

industry average from below,

The market will react more positively than when the

firm is moving away from the industry average.

FD-57 The currently popular real business cycle paradigm N O I Approach

proceeds under working hypothesis that
Financial structure is irrelevant.

FD-58 Unique Optimal Capital Structure exists in the Optimal Capital Structure

steady State if non debt Corporate tax Shields like

Depreciation Deductions, Investment Tax Credit are

Introduced.

FD-59 Optimal Debt levels are similar to those observed in Optimal Capital Structure

practice.

FD-60 Determinants of Capital Structure are universal Optimal Capital Structure

across the Companies.

FD-61 Firms which prefer to finance their investment Pecking Order Theory

activities through self-finance are

more profitable than firms which finance

investment through borrowed capital.

FD-62 When and Why firms issue common stock is not Pecking Order Theory

fully understood as yet.

FD-63 Firms Follow Pecking order While Offering the Pecking Order Theory

Securities through the IPO.

ID-64 Pecking Order Model has greater confidence level Pecking Order Theory

than Trade-Off Model.

ID-65 Conservative Firms follow Pecking Order style of Pecking Order Theory
 34

Financing Policy.

FD-66 The Financial Structure of Quoted and Unquoted Pecking Order Theory

Firms is as per Pecking Order theory.

FD-67 67. Larger firms have better access to External Pecking Order Theory

Finance than Smaller Firms.

FD-68 Signaling theory suggests a positive relationship Signaling Theory

between a firm's financial leverage and cash flow,

While pecking order behavior implies a negative

relationship.

FD-69 Capital Structure does matter and is consistent with Signaling Theory

Information Signaling Hypothesis and

Agency Cost Hypothesis.

FD-70 70. Extent of leverage in Capital Structure and the Stake holder’s Theory

Wage policy of a firm are independent.

FD-71 Human Assets Specificity has no co relation with Stake holder’s Theory

the Firm's Capital Structure.

FD-72 The Tax advantages of Debt must be balanced Tax Shield

against Bankruptcy and Agency Costs.

Table No: 2

No Normative Statements for Investing Decisions Theory / Approach /

Concept

ID-1 The Asset Pricing Theory involves the characterization CAPM

of investments that can be viewed as close economic

 35

substitutes and thus should have similar expected rate

of returns.

ID-2 The Asset Pricing Theory is concerned with estimation CAPM

of the cost of capital or the expected rate of return for a

given financial security or portfolio.

ID-3 CAPM model is used by the managers while finalizing CAPM

a Capital budgeting Decision, is universally accepted.

ID-4 Leverage and Cash flow tend to be negatively Cash flow

correlated.

ID-5 Expected return and cost of capital are negatively Cost of Capital

related to liquidity.

ID-6 With Perfect capital Markets, Firm's Investment Efficient Capital Market

Decisions are independent of it's Financial Conditions.

ID-7 The Empirical results of firm's Value Maximization Financial Performance

and firm's Size maximization are consistent. Management

ID-8 Optimal hedging strategy does not does not generally Financial Performance

involve complete insulation of Firm Value from Management

marketable Sources of Risk

ID-9 Managers Purchase Projects , that increase the value of Financial Performance

the Firm , than Utility. Management

ID-10 The Hurdle Rate is similar for Growth and Value firms. Hurdle Rate

ID-11 The efficiency of capital allocation is negatively Investment Decision

 36

correlated with the extent of state ownership in the

economy.

ID-12 The efficiency of capital allocation is positively Investment Decision

correlated with the legal protection of minority

investors.

ID-13 In the presence of irreversibility, theoretically, demand Investment Decision

and interest rate uncertainty both reduce demand for

capital.

ID-14 Theory for Capital budgeting under uncertainty needs a Investment Decision

rethinking.

ID-15 One Firm's Bond is identical to other firm's Bond. Investment Decision

ID-16 The Capital Budgeting Decisions of a Private Investment Decision

enterprise and Public (Federal) enterprise are same.

ID-17 The Modern Capital Budgeting Techniques consider Investment Decision

the total Risk of the project while evaluating a

Proposal.

ID-18 Lenders Syndication and inefficient behavior, Strategic Investment Decision

Default of borrower are unrelated.

ID-19 Ownership Status of a firm and rate of Return are Investment Decision
independent.

ID-20 Intra Group Cash transfers are made with the intention Investment Decision

of earning return on Idle cash.

ID-21 Sophisticated Capital Budgeting techniques are used by Investment Decision

the CFO's globally.

ID-22 Capital investment and Appraisal methods are used on Investment Decision
 37

ad-hoc basis.

ID-23 The Firm Size has an impact on the way Asset Investment Decision

Structure Correlate with Capital Structure.

ID-24 The efficiency of capital allocation is positively Information Asymmetry

correlated with the amount of firm-specific information

in domestic stock returns.

ID-25 Information and Incentive problems in Capital Market Information Asymmetry

have important effects on Corporate Investments.

ID-26 Low-Risk as well as High-Risk firms are consistent Information Asymmetry

with the models revealing effect of Risk and

Information Asymmetry in determining the debt

maturity.

ID-27 IRR always reaches the same decision as NPV in the I RR

normal case where the initial outflows of an

independent investment project are only followed by a

series of inflows.

ID-28 Some projects have cash inflows followed by one or I RR

more cash outflows. IRR rule is inverted here: one

should accept when the IRR is below the discount rate.

ID-29 The Investment Opportunities are evaluated by NPV NPV

method is generally correct.

ID-30 Any adjustments for debt financing are reflected in the NPV

discount rate, not the cash flows.

 38

ID-31 Profitable firms have Optimal Leverage. Optimal Capital Structure

ID-32 Ratio of Current Assets to Capital Stock is not Ratio Analysis

associated with the size of the Firm.

Table:3

No Normative Statements for Dividend Decisions Theory / Approach /

Concept

DD-1 The Dividend payout is a significantly negative Agency Cost Theory

function of percentage of stock held by the insiders

DD-2 The “bird-in-hand” argument suggests that dividend Bird-in-Hand Theory

policy matters because investors value current

dividends more highly than uncertain future capital

gains.

DD-3 The Dividend payout is a significantly negative CAPM

function of firm's beta coefficient.

DD-4 Cash flow and taxation are significant determinants Cash flow

of Dividend behavior.

DD-5 The Dividend payout is a significantly positive Clientele Theory

function of firm's number of common stockholders.

DD-6 U S Firms pay dividend out of foreign earning at Clientele Theory

about three times the rate that they do out of their

domestic Earning.

DD-7 The rate of profit required by the market is a superior Dividend Decision
 39

measure than income & dividend yield.

DD-8 Before Capital budgeting theory can be made a Dividend Decision

reliable guide to action, improvement technique,

measuring future revenue is needed.

DD-9 Firms should not pay dividend, when it has to Dividend Decision
generate case by selling stock.
DD-10 Why firms pay dividend and simultaneously raise Dividend Decision

funds in Capital Market? is answered by Finance

Theories.

DD-11 Change in taxation Policy causes change in Dividend Decision

company's Dividend Policy

DD-12 Pile of evidence, decades of theoretical debate is not Dividend Decision

capable of solving the dividend puzzle and its impact

on Firm Value.

DD-13 The harder we look at the Dividend Picture, the more Dividend Decision

it seems like a Puzzle, with pieces that Just don’t fit

together.

DD-13 There is positive correlation between the current Debt Dividend Decision

and Past Dividend.

DD-14 Economic rational can explain the Dividend Dividend Decision

phenomenon.

DD-15 Sensitivity Analysis and Monte Carlo techniques are Dividend Decision

used mutually exclusively for Risk Quantification.

DD-16 Capital Structure and Dividend Policy, of a firm are Dividend Decision
not correlated.
DD-17 As long as the probability distribution of the firm’s Financial Performance
 40

cash flows is fixed and there are no tax effects, the Management

firm’s choice of dividend policy leaves the current

market value of the firm unaffected.

DD-18 For Self-Interested Manager Leverage Choices Financial Performance

deviate from Optimum leverage, which maximizes
the firms Value. Management

DD-19 The changes in dividend are positively correlated Signaling Theory

with future changes in profitability and earnings.

DD-20 The Dividend payout is a significantly negative Signaling Theory

function of firm's past and future growth rates of

sales.

DD-21 Changes in Dividends have information contents Signaling Theory

about future earnings of the firm.

DD-22 The declaration of Cash or Stock Dividend elicits Signaling Theory

significantly positive abnormal returns.

Table No: 4

No Normative Statements for Other Decisions Theory / Approach /

Concept

OD-1 Consistent with agency cost explanations, over- Agency Cost Theory

investment is concentrated in firms with the highest

levels of free cash flow.

OD-2 Manager of the firm is the Agent of the Shareholders. Agency Cost Theory
 41

OD-3 Agency Theory has provided useful tool for detailed Agency Cost Theory

analysis of determinants of complex Contractual

Arrangements called the modern Corporation.

OD-4 Agency Costs are not significantly different of Family Agency Cost Theory

managed Businesses than other firms.

OD-5 Managers Behave solely for the interest of Agency Cost Theory

Stakeholders.

OD-6 Accounting rate of Return, ARR as a technique of A RR

Capital Budgeting is used by lesser companies w.r.t.

DCF.

OD-7 Behavioral Corporate Finance Literature has matured Behavioral Finance

enough and addresses to almost all major Issues in

Corporate Finance.

OD-8 In CSR the Concept of Triple Bottom Line is CSR

sensible.

OD-9 Flow-based insolvency occurs when operating cash Cash Flow

flow is insufficient to meet current obligations.

OD-10 A decrease in cash / collateral decreases investments, Cash Flow

holding fixed the profitability of investments.

 42

OD-11 The free cash flow hypothesis dominates the Cash Flow

corporate governance hypothesis in terms of the net

effect of stock market liberalization on a firm’s stock

returns.

OD-12 Free Cash flow Theory predicts, Mergers and Cash Flow

Takeovers would create value.

OD-13 Firms having greater access to Capital Market , tend Cash Flow

to hold lower cash.

OD-14 Cash flow has a Positive effect , on investment Cash Flow

,irrespective of Size of the firm,

OD-15 Better governed firms are likely to have smaller cash Corporate Governance

holdings and higher stock returns.

OD-16 Corporate Governance protects the interests of Corporate Governance

minority Shareholders.

OD-17 The relationship between Corporate Governance and Corporate Governance

Firms Earnings are Positive, Globally.

OD-18 Weak Governance Systems have failed widely. Corporate Governance

OD-19 Existing Theories are sufficiently complete to include Corporate Governance

all major determinants of good Corporate

Governance.
 43

OD-20 International Diversification of the Firm has no Debt Equity Ratio

relation with the Debt Equity ratio as well as Cost of

capital.

OD-21 EVA is a better financial performance measure than Financial Performance

other traditional measures. Measurement

OD-22 The more liquid a firm's assets, the less likely the firm Financial Performance

is to experience problems meeting short-term Measurement

obligations. But liquid assets frequently have lower

rates of return than fixed assets.

OD-23 Firms with high Tobin's Q ratios tend to be those Financial Performance

firms with attractive investment opportunities or a Measurement

significant competitive advantage.

OD-24 Stock-based insolvency occurs when a firm has Financial Performance

negative net worth, and so the value of assets is less Measurement

than the value of its debts.

OD-25 Tobin’s Q exceeds one, even without any adjustment Financial Performance

costs, for a firm that earns rents as a result of Measurement

monopoly power or of decreasing returns to scale in

production.

OD-26 Valuations derived from industry multiples based on Financial Performance

 44

reported earnings are closer to traded prices than Measurement

Those based on reported operating cash flows.

OD-27 Financial Performance

Ratio Analysis is limits to the world of " Nuts and Measurement

Bolts".

OD-28 Corporate value is a function of the structure of Financial Performance

Equity Ownership. Measurement

OD-29 Increase in Leverage has led to decrease in interest Financial Performance

Coverage ratio. Measurement

OD-30 Risk Management at firm level represents a means to Financial Performance

increase firm value to shareholders. Management

OD-31 Valuation of Privately held small firm and a large Financial Performance

Publicly held firm uses same methodology. Measurement

OD-32 Value based methods promote maximization of Financial Performance

Economic worth of an organization by allocating its Measurement

assets to its best use.

OD-33 Perfect Correlation between Value measurement and Financial Performance

Stock Price is possible. Measurement

OD-34 Managers are Rational in their perspective on Financial Performance

earnings bench mark and earnings management. Measurement

OD-35 Disclosure quality improves investors’ welfare by Information Asymmetry

 45

reducing cost of capital in a competitive market.

OD-36 Increased Transparency increases the Firm's Value. Information Asymmetry

OF-37 Increased Disclosure reduces the estimation of Risk. Information Asymmetry

OD-38 Mergers are the most efficient way of Corporate take Mergers and Acquisition

over.

OD-39 Conglomerate merger is equally beneficial to the Mergers and Acquisition

acquired as well as acquiring enterprise.

OD-40 Receding demand would minimize the chances of Mergers and Acquisition

Merger; even though the acquired company has free

cash flow.

OD-41 Takeover financed by cash and debt would generate Mergers and Acquisition

larger benefits than those financed by Stock

exchange.

OD-42 Premium paid to Target Company, at takeover is an Mergers and Acquisition

Wealth Re distribution and not Wealth gain.

OD-43 Financial Institutions help to satisfy the inter temporal Other Decisions

primary lenders & Primary borrowers.

OD-44 Stock Market plays significant role in macroeconomic Other Decisions

 46

modeling and policy discussion.

OD-45 The Price level moves cyclically. Other Decisions

OD-46 Financial Fragility is caused because of low net worth Other Decisions

and heavy reliance on external Finance.

OD-47 When the recovery phase in economy starts firms are Other Decisions

inclined towards Capital Expenditure rather than,

Restructuring their Balance Sheets.

OD-48 The Stock buying behavior of an investor can be Other Decisions

predicted by use of existing Model.

OD-49 Collapse of Asset pieces or an aggregate demand Other Decisions

shock that reduces firm’s equity would result in

decreased supply of external finance.

OD-50 Family managed business Groups and Domestic Other Decisions

Financial Institutions are poor monitors than Foreign

Institutional investors.

OD-51 The Corporate Finance theories are examined Other Decisions

universally, i.e. Developing & Developed Capital

Markets.

OD-52 Announcements of Joint Ventures have a Positive Other Decisions

effect on the value of the Firm.

OD-53 The Policy Makers did explain the Public and Other Decisions
Academicians, the precise nature of Market failure of
2008.
OD-54 Stock Market Liberalization leads to more efficient Other Decisions
 47

allocation of Capital.

OD-55 Special Items receiving income statement Other Decisions

presentation are more transitory, than those receiving

footnotes presentation.

OD-56 Average returns of Firms having small Market Portfolio Theory

Capitalization are high, given their Beta estimates;

and average returns of firms having Large Market

Capitalization are low.

OD-57 In Private Equity, The Operational value Creation is Private Equity

similar irrespective of owner’s dedication.

OD-58 The assumptions made by the economists, about, Profit Maximization

Profit Maximization are in line with the reality.

OD-59 The Prospect Theory explains the IPO market Prospect Theory

Behavior.

OD-60 Conventional Ratio Analysis has little academic Ratio Analysis

relevance.

OD-61 Discriminate-Ratio model is extremely effective in Ratio Analysis

predicting bankruptcy.

OD-62 Current profits can be a poor reflection of true future Signaling Theory
 48

profitability.

OD-63 Numbers in Financial Results are relevant and can be Signaling Theory

indicative of Future Performance.

OD-64 In after tax analysis the differences in accounting rate Tax Shield

of return correspond to the differences in economic

rate of return.

OD-65 Indian Business Groups are following "Tunneling" Tunneling Effect

(Expropriation).

OD-66 Wealth maximization implies maximization of firms Wealth Maximization

market value.

2.5 Nature of Data-

In case of a qualitative research, the data is also qualitative. In the present study the data is

in the form of Research Papers. These research papers are selected on the basis of specific

criterion, such as the research paper has to be a seminal paper.

A Seminal Paper / Research article is a piece of work where a concept or idea is first

Established, or the author proposes an idea, which gets major attention in the subject.

A seminal work is a piece of work that everyone from the fraternity keeps bringing up

over and over again.

The researcher accessed about 1500 research papers / research articles from sources like Jstor,

EBSCO, Science Direct, Scirus, SSRN and like.

 49

The articles cover a big time period. From 1945 till date. i.e.it starts from 1945 till date, a

wide spectrum of about 70 years. The papers having strong research methodology, well

defined research problem and having wider time span were selected. While short listing the

research papers for analysis due care was taken so that papers exhibiting the same idea as well

as papers having poor research methodology were omitted.

The data for this study was is the form of the seminal research papers. Standard text books

were also referred however such text books could not be considered as data. The emphasis

was on selecting the quality research papers. The research papers showing strong clarity of

thought were selected.

Unlike the quantitative research, where the emphasis is on numerical data, in qualitative

research, the data is generally non numeric.

The researcher has broadly categorized tall the research papers in four types

A. Financing Decisions

B. Investment Decisions

C. Dividend Decisions and

D. Other Decision

The researcher, on the basis of the theories, selected the normative statements; the variables

are in the form of normative statements. The normative statements are selected from the

standard text books of corporate finance. These statements are classified as per the specific

Theory/ Approach / Concept. Due care was taken by the researcher to avoid the papers /

articles yielding repetitive results or discussing same or similar Theory / Approach /Concept.

The research papers were chronologically arranged.

 50

2.6 Scope of the study:

As the markets started expanding, the microeconomics became important. Finance has been

evolved from the domain of economics. When business started crossing the Geographical

boundaries, when cross border transactions started taking place, then the microeconomics

became corporate finance. This transition happened in 20 th century. The substantiation of

theory happened after both the world wars. Hence first reference of this study dates back to

the year 1945 and the time span or canvas for this study is from 1945 till date.

While studying the global aspect of finance, views and researches documented by the global

Management thinkers are reviewed without disregarding or neglecting the local or region

bound researches. For example while studying the Theories/ Approaches / Concepts of

dividend policies, the papers dealing with global perspective were selected and studied. As

well as the Papers dealing with the similar theme, but were region bound were also selected

and reviewed.

The reason behind this is to test implication of the same theory on local or regional basis.

Pilot Study- When the study is of qualitative research type no pilot study is warranted.

Researcher’s field experience and academic experience was the basis of interest in this study.

Researcher observed that, in the literature of corporate finance, words are interchangeably

used

For example, M M Hypothesis is also referred to as MM Approach or Signaling theory is

alternatively referred to as Signaling Approach, in reality both of these are concepts. As far as

field experience of researcher is concerned, concepts like managerial entrenchment, agency

costs And their effect on the decision making of the firm was studied. There are so many

questions in the domain of corporate finance, which are unanswered till date. Questions like

The extent of Dividend to be paid to the shareholders, the proportion of debt and equity in the

capital structure of the firm, maturity structure of firm’s debt instruments, marketing of the
 51

firms securities and like.. are still not convincingly addressed by the existing theories in

corporate finance.

On test basis some observations were tested on the research papers. While practicing the

profession of an academician answers to such questions cannot be conveyed to the students.

2.7 Objective and Hypothesis of the Study-

The objective of this study is to test the relevance of select corporate finance theories. And to

know whether a relook is necessary, on the basis of the ongoing research in the domain of

select theories of corporate finance.

Hypothesis: “The development of theory of Corporate Finance is leading towards chaos

and Confusion.”

2.8 DATA COLLECTION AND SAMPLING -

Sampling- Sample for this study was definite. Theory / Approach / Concept was taken into

account. The normative statements’ pertaining to specific Theory / Approach/Concept was

taken. The relevant research papers / Research article was classified according to the broad

category viz. The Financing Decisions , The Investing Decisions, The Dividend Decisions and

Other Decisions. The research papers which were yielding same or repetitive conclusion were

omitted. Papers having clarity of thought, good research methodology were selected and

classified as per the theory. More than 1500 papers were read and after filtering these papers

on the above mentioned norms 216 papers were selected. These papers were used for the

analysis of the study.

Data Collection and Data Cleaning- Research papers relevant to the four broad categories

were selected. The sources such as Prowess, SSRN, Science Direct, Emerald,
 52

Jstor were extensively used.

As Stated above, from a wide range of over 1500 papers seminal papers were selected and

classified as per the theme of the paper. Wide geographical canvas was selected to study the

Theory / Approach / Concept.

The Normative statements were classified as per the broad classification of Theories viz.

The Financing Decisions, Investment Decisions, Dividend Decisions and Other Decisions.

Further Various Theories / Approaches / Concepts under each decision were grouped

alphabetically.

The normative statements were written row wise. The selected Research Papers were then

grouped with normative statements.

Each Research paper was read thoroughly and then grouped with appropriate normative

statement.

If the research paper was in conformity with the normative statement then raking of “1” was

assigned, whereas when the research paper is not in conformity with the normative statement

then, ranking of “-1” was assigned.

After assigning ‘1’ or ‘-1’ as the case may be, the research papers neither showing any

conformity nor showing any difference ‘0’ was assigned. It is important to know that ‘0’ value

assigned means, those aspects of Theory / Concept / Approach are ignored by the researchers.

Or research in that aspect is not documented as yet.

Data Analysis: As stated above all the rows are of normative Statements and all the columns

were of Selected Seminal Research papers /Articles. These Papers / Articles were arranged

chronologically. The oldest research paper was of the year 1945.

The variables in this analysis were the normative statements. And the values assigned for the

purpose of analysis were 1 and -1. These are dichotomous outcome outcomes or variables.
 53

This means “having only two possible values”. These variables are simplest and intuitively

clear type of random variables.

When values were assigned to the variables further analysis was done.

There is a distinct difference between the qualitative research and quantitative research as

cited below. (Sharan B Merriam, 2009).

Table:5 – COMPARISON OF QUALITATIVE AND QUANTITATIVE RESEARCH

Point of Comparison Qualitative Research Quantitative Research

Quality (Nature, Essence) Quantity (How much?,

Focus of Research
How Many?)

Phenomenology, Symbolic Positivism, Logical

Philosophical Root Interactionalism, constructivism Empiricism, Realism

Ethnographic,Naturalistic,grounded, Experimental, Empirical,

Associated Phrases
Constructivist Statistical

Understanding, Description, Prediction, Control,

Goal of Investigation Discovery, Meaning , Hypothesis Confirmation and
Generating Hypothesis Testing
Design Characteristics Flexible, Evolving, Emergent Predetermined, Structured

Researcher as a Primary Instrument, Scales, Tests, Surveys,

Data Collection
Observations, Documents Computers

Inductive, Constant, Comparative Deductive and statistical

Primary Mode of Analysis
Method

Comprehensive, Holistic, Precise and Numerical

Findings
Expansive and Richly Descriptive
 54

The essence of quantitative research is to achieve an understanding of how people make sense

out of their lives and describe how people interpret what they experience.

Van Mannen(1979) has very appropriately described the qualitative research as “ an umbrella

term covering an array of interpretative techniques, which seek to describe, decode, translate

and otherwise come to terms with the meaning, not the frequency of Certain more or less

naturally occurring phenomena in the Social world.

Basically researchers are interested in understanding the meaning people have constructed.

Quite often the qualitative researcher undertakes the study when, there is lack of theory or the

existing theory fails to explain the phenomena.

Horizontalization technique was used for the analysis the data. As mentioned earlier in this

chapter, this is a process of lying out all the data for examination and treating the data as

having the equal weight. This means all pieces of data have equal value at the initial data

analysis stage. The data is then organized into clusters or themes.

As stated earlier, the researcher grouped the Selected Seminal research papers and each

research paper was analyzed, in the light of the normative statement, pertaining to the theory/

Approach/ Concept. When the normative statement and the inference/ conclusion of the

research paper were in congruence / conformity a value of “1” was assigned, when they were

diverse then a value of “-1” was assigned.

Entire row was analyzed. In certain cases, a specific normative statement was relevant for

more than one research papers then, accordingly “1” of “-1” values were assigned.

Then the descriptive statistics was used for the purpose of Analysis. As descriptive statistics

are used to describe the main features of collection of data in quantitative terms. Here main

aim is to quantitatively summarize the data set rather than being used to support the inferential

statement.
 55

Then the mean values for each theory as classified accordingly as per the, Financing

Decisions, Investment Decisions, Dividend Decisions and Other Decisions.

When The mean value is 1 which means, the theory and the research findings of various

researchers are in line with each other, means he theory has support. If the mean value is -1

then the theory is rejected by the researchers. When men value is 0, then the theory is neither

accepted or nor fully rejected, this is a stage which leads to confusion.

The researcher has observed that for all the Theories / Approaches / Concepts the mean values

are near 0. Which is the evidence for acceptance / proof of the hypothesis of this research

study.

2.9 Limitations of the Study:

Like conventional research, the mathematical accuracy was not emphasized. This study, being

a qualitative research, lacks mathematical accuracy. Like Quantitative study this type of study

does not demand extensive usage of inferential statistics. As well, extensive usage of

statistically reliable analytical tools for data analysis was not required hence not utilized.

Manmade systems has limitations hence this study is no exception to that limitation.

As this study has been entirely based on the Seminal Research Papers / Research Articles,

even though, necessary care has been exercised, bias might have been possible, which was

purely unintentional. Similarly when data was analyzed, bias could have been a possibility.

In qualitative research, with specific reference to this type of study, availability of data is a

cause of concern. The data which is extensive as well as reliable was lacking. The need of

reliable Data Repository was strongly felt while analyzing the data.

The presentation of this study would be in the form of a chronicler. The analysis of the data

and the support or evidence revealed by the study has been compiled in the form of a

chronicler. Typically the facts and events are stated in a chronological order in a Chronicle.

The person compiling this is typically called as chronicler, who largely remains anonymous.
 56

Equal weight is given to the events as they occur, the purpose being the recording of the

events. Here in this study, the researcher has attempted the same. Various views / observations

of the researchers with respect to the select corporate finance theories are being compiled. The

effort has been made to test the efficacy or usefulness of the select corporate finance theories

and the same has been presented as a chronicler.