Do Companies in Emerging Economies have sub-optimal capital structures?

Capital structure is defined as mix of debt and equity used by firms to finance their investments. Two most preferred theories explaining the determinants of capital structure are Trade-off theory and Pecking Order theory. Pecking order hypothesizes that there is no target capital structure (unlike Trade-off theory) and the level of leverage is determined by the market conditions and investment opportunities available to firms. As per pecking order theory firms prefer internal sources over external and debt over equity for raising funds to finance their investments.

Trade-off theory on the other hand hypothesizes that there exists a target debt at which the cost of capital for a firm is least. Firms try to minimize the deviations between actual and target debt levels and only tolerate such deviations when it is costly to correct them. However, firms deviate from their targets due to several firm-level, industry-level and macro-economic factors. Existing empirical research on Indian firms evidences support for Trade-off theory over Pecking order theory.

The major drawback with the interpretation of Trade-off or Pecking order theory is that they have been tested rigorously over the last 2 or 3 decades in developed markets only, where firms are less constrained in terms of instrument choice for raising funds and markets are more liquid (I am not undermining the existing work done in emerging markets anyways.) This is an unlikely scenario in many emerging economies including India. The most preferred external source of funds for firms in emerging economies is bank debt either due to its low cost or due to limited access to equity markets…..

Target capital structure of each firm is simple calculated taking industry aggregates which itself may be sub-optimal. Even the better statistical methods using regression equations suffer from the bias since they are derived from the same sample of firms. A better method may be to incorporate a controlling variable for sub-optimal debt for testing the Trade-off and Pecking order theories in emerging economies.

University reforms may be attended to by GOI- Finally!

Initial statements of Kapil Sibal on assuming the role of education minister in the newly elected Congress government at the center are very encouraging. Since my days of post graduation I have believed that we needed better foreign universities in the country and also needed government to focus more on the education in this country.

Was reading an article in Business Line last week (written by a Prof from Columbia University) where the writer rightly highlighted how teaching and research have been split due to poor government policies to higher education. Specialized research institutes in area of science and a couple of in social sciences area are the ones only for research and receive grants from central government while others are meant for passing out with degrees taught by teachers having limited background of research.

Teaching profession in India is left just to teach and evaluate exam papers with add-on responsibilities of administration. Very few top higher education institutes in India talk of research as an additional role that a faculty has to adhere to. I can understand this when I tried doing a literature review in area of capital structure pertaining to Indian firms and I could draw the stark difference in the quality of research done in India compared to developed countries.

I am an aspiring academician who intends to have more than 50% of time available with support of funds to conduct research in the area of my interest…

Few suggestions for Kapil Sibal for reforming education sector in India:
a) Go ahead and dissolve UGC and AICTE- you are on right track
b) Ensure better and higher reward system for teachers at school level so that best continues to be interested in pursuing the career in teaching- this is very critical since that’s where the foundation for the future India is going to be built
c) Allow foreign universities into India with appropriate pre-conditions, ensuring education is made profitable but not commercialized
d) Centralize the grant to national universities and give them more funds for research- conditions are bad as of date

As per my estimates this may still take 10-15 years to happen..atleast the ones born today will get what we intend to give them…

Living life beyond life (beyond wants and desires)

Life is not about defining and striving to achieve everything that you intend to. Leveraging life to fulfillment from my perspective is beyond this- much more than striving and fulfilling your wants. But then attaining that spiritual state requires one to experience the life in the sense of what is called “BEING PRACTICAL”. Experience life by working to gain what you desire to have etc..etc.

Post this the stage of striving for internal happiness, spiritual satisfaction comes. This stage in other words may be defined as stage of NO CONFLICTS. No conflicts means perfect harmony both as perceived internally and felt externally through our senses. Personally I have realized that we are living within confines of life- being social animals as humans are called.

Will I get what I want?- see its again defined….Death seems to be ultimate truth.