Research Proposal on "Nature of a Company's Asset Base (Tangible"

Research Proposal 48 pages (14899 words) Sources: 20 Style: Harvard

[EXCERPT] . . . .

NATURE OF a COMPANY'S ASSET BASE (TANGIBLE OR INTANGIBLE) AFFECT CAPITAL STRUCTURE CHOICES: AN EXAMPLE USING INDIA DATA

The purpose of this paper is to investigate whether the nature of a company's asset base (tangible or intangible) affects the capital structure policies of that company. This will be done using company data and information from India, and through interviews examining the choice of capital structure and the role of asset tangibility from the perspective of those who actually operate these companies.

The study employs qualitative data in examining the nature of a company's asset base and whether it affects the capital structure choices. This is a personal choice of the people who operate the company, and the 'why' of what they do is generally considered to be more important than the fact that they do it. The 'why' is very important, because it shows the rationale behind the correlation between capital structure choices and the nature of a company's assets.

The results of this study indicate that the tangibility in the manufacturing sector is different from the tangibility in the services sector, and this determines some of the relationship between the variables. While the sample is not large, it is reasonable to assume that, had the sample been larger, the conclusions would have been similar. However, because of the limited number of companies interviewed, it is not possible to expand the data to definitively say that all companies handle their capital structure decisions and asset bases this way. The main value of this paper is to identify whether the company's asset base affects the capital structure decisions, and determine what crite

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ria are used to make the determination of what capital structure the company selects.

Keywords -- Capital Structure, Asset Tangibility

Paper type -- Dissertation - Descriptive Analysis

Table of Contents

Introduction

Background of the Research

Problem Definition and Objective

Motivation for the Study

Outline for the Dissertation

Literature Review

Introduction to Capital Structure

Indian Capital Structure

Debt and Money Markets in India

Overview of Capital Structure Theories in Relevance to the Nature of Assets

Empirical Findings on the Capital Structure Choice

Vital Intangible Resources

Intangible Resources not on the Balance Sheet

Research methods used by previous investigators

Data Methodology

Dependent and Independent Variables

Dependent Variable -- Debt Equity Ratio (Y)

Independent Variable -- Tangibility (X)

Types of Relationships

Population and Sample

Collection and Tabulation of Data

Data Analysis Procedure

Limitations of the Study

Reliability and Validity of the Data

Data Analysis and Findings

Conclusion

Bibliography

Appendices

Introduction

The nature of a company's asset base can depend on several factors. Whether this asset base is tangible or intangible can then, by extension, affect the capital structure choices that company makes. In order to clarify that and see the way these issues tie together, it becomes very important to look at research that others have done, and then to do further research. This fills in the gaps, provides current information, and extrapolates what has already been discussed into something larger that can, hopefully, be expanded to more companies. While the example of India will be used here, it is believed that this information could potentially extend to companies in other countries, as well.

Both management teams and potential investors want to know whether a company is stable, solid, and over- or under-borrowed when considering it. Whether they may be putting some of their money into it, trying to take it over, or thinking of working for it, they certainly want to know whether it is going to remain in the marketplace. That is only common sense. Unfortunately, many countries do not have well developed companies or well developed stock markets in which to showcase those companies.

That is a serious problem, of course, because it makes it much more difficult for investors and management teams to make any real decisions. It also makes it difficult for companies who are coming into the marketplace to determine whether they are moving in the right direction and handling things in the right way. As an example in this paper, India will be discussed. Its stock market is not strong, and there are company and community problems within its borders. This can make it difficult for any company wanting to settle in India, and can also make it difficult for investors and management teams who are considering moving into the Indian market.

Background of the Research

Financing choices and decisions not only have the potential to influence the value creation process, they routinely do just that. According to La Rocca, La Rocca, and Gerace (2008), financing decisions may influence "efficient investment decisions according to the existence of conflict of interest between managers and firm's financial stakeholders (shareholders and debt holders) and, in turn, affect the relationship with non-financial stakeholders such as suppliers, competitors, customers, etc."

In their study "A Survey of the Relation Between Capital Structure and Corporate Strategy," Rocca, Rocca & Gerace (2007) find that the actual, as well as the potential, interaction that managers, financial stakeholders, and nonfinancial stakeholders engage in impacts the firm's capital structure. This interaction, along with other actions, consequently may contribute to a rise in inefficient managerial decisions and potentially negatively impact the industry's competitive dynamics.

In recent years, with the rapid growth of economic and financial markets in India, a large number of companies in that country have "gone public" each year. In fact, at the end of 2008, more than 500 Indian companies were listed on the National Stock Exchange. This contemporary, impressive growth of listed companies on numerous exchanges provides an excellent opportunity for foreign corporations to locate an appropriate Indian firm and partner with them to enter the Indian market. However, the stock market in India is still not strong, and there are serious disadvantages to locating a company there, taking over a company that is already located there, or investing in a company located in that region. The propensity for problems may be greater than what is seen in other countries where stock markets and businesses are more established.

Many foreign companies prefer to operate as joint ventures. Because of this, it is vital that the individuals who make financial decisions in this area understand the issues regarding capital structure policy of listed Indian firms. During this qualitative study, the impact of the nature of a company's asset base on the capital structure choices will be examined. Since firms are required to disclose all accounting information, the reported information from the large number of publicly listed companies provides a forum for the study of issues related to capital structure policy.

Problem Definition and Objective

The capital structure decision is one of the most fundamental issues seen in corporate finance. Numerous studies have been conducted to analyze the general factors that affect the capital structure decision of a company. However, most of the studies have concentrated only on developed economies like the UK and the U.S. Most of the work regarding the factors affecting capital structure relates to conditional theories based on case studies. Each one of these emphasizes certain costs and benefits of alternative financing strategies that have been followed by specific firms. Because the theories are not general, testing them on a broad, heterogeneous sample of firms can be uninformative.

This study considers one of the major factors which influences the capital structure decision of a company, that being the nature of the assets of that company and whether they are tangible or intangible. The study also analyzes the influence on capital structure decisions using data from publicly traded firms in India and interviews which indicate not only whether a company chose a capital structure based on its asset base, but why the company made that decision.

The research question for this study, therefore, is as follows:

Does the nature of a company's asset base (i.e. whether the asset base is tangible or intangible) affect that company's capital structure choices?

The following secondary questions are also of interest:

What makes a company choose a specific capital structure?

Is there a pattern which indicates that all companies of a certain type utilize a certain capital structure?

Is the capital structure or the asset base (or a specific combination of the two) indicative of success or failure exclusive of other conditions?

Motivation for the Study

The researcher's personal interest in corporate finance served as the motivation for this research effort. Reading literature in the area of capital structure also stimulated the researcher's resolve to address a number of questions relating to this phenomenon, while simultaneously enhancing the reader's understanding. It is crucial that a researcher understand what he or she is researching, because there are many issues surrounding discussions about financial issues. Not knowing what to look at in order to get the desired answers can provide false data that could lead the researcher -- and his subsequent readers -- in the wrong direction.

Outline for the Dissertation

In this chapter, an introduction and background to the study were briefly provided. In addition, the… READ MORE

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Quoted Instructions for "Nature of a Company's Asset Base (Tangible" Assignment:

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Supervisor's Comment on the dissertation submitted. I will send the earlier dissertation and the supervisor's comments in a word format via email

Topic

Does the nature of a company*****s asset base (tangible or intangible) affect capital structure choices: An examination using Indian data.

The dissertation consists of five chapters:

1. Introduction. This is poor. There needs to be a clear statement of what problem is being addressed and what benefits should flow from its investigation. The theme could be how investors (or a management team) can assess whether a company is under or over borrowed. The Indian context could be introduced as an example of a less than well developed stock market.

2. Literature Review. This is patchy. There are some highly relevant studies mixed in with some that are pretty unrelated to what is going on. There is however an attempt to structure the review e.g. separation of discussion of methodologies adopted from discussion of results. I should have liked to see:

*****¢ Prior mainstream studies in the Indian context.

*****¢ Studies dealing with the impact of asset type on gearing.

*****¢ Samples and statistical methods used in the Indian literature.

This approach would have allowed the development of a new sample and a model which took the form of an acceptable mainstream model plus one additional independent variable.

3. Data Methodology. The student has recognised the need to get variation in asset tangibility in his sample, but beyond that the reasoning behind his sample selection is unclear. Why 10% of the available firms? How were they selected? Why was this method of selection adopted?

I think the data set is a panel of data, but this isn*****t clear.

The data collected is drawn from balance sheets rather than markets. This choice has been adopted by investigators in the past although capital structure theoretical arguments are typically couched in market value terms. A justification of the emphasis on book value is needed. It doesn*****t have to be novel, but it does have to be present. The tangibility variable is critical. Its definition needs more thought.

The last six pages of this section list statistical techniques to be used. These are basic and misunderstood. The student needs to understand that tests are valid if data support their underlying assumptions. Reporting two tests with different assumptions on the same data set isn*****t satisfactory. The student needs to work out which tasks are to be undertaken and which tests are appropriate. If the analysis is to be a test of difference in means then similarity of variance needs to be investigated, not assumed.

The section of the literature review dealing with methods should have helped in designing the investigation but hasn*****t.

4. Data Analysis and Findings. This is simply at far too superficial a level. What is needed here is investigation of tangibility as an additional variable.

5. Conclusions. This is inadequate. It reads as if the student didn*****t know why he was carrying out the analysis and hence couldn*****t reach conclusions.

Interviews dealing with choice of capital structure and the role of asset tangibility might be a better approach

*****

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