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Emperor International Journal of Finance and Management Research [EIJFMR] ISSN: 2395-5929

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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

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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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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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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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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

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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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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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