IDEAS home Printed from https://ideas.repec.org/a/gam/jijfss/v9y2020i1p1-d466259.html
   My bibliography  Save this article

Determinants of Intercorporate Investments: An Empirical Investigation of Indian Firms

Author

Listed:
  • Vedika Saxena

    (Indian Institute of Management Lucknow, Prabandh Nagar, Off-Sitapur Road, Lucknow (UP) 226013, India)

  • Seshadev Sahoo

    (Indian Institute of Management Lucknow, Prabandh Nagar, Off-Sitapur Road, Lucknow (UP) 226013, India)

Abstract

We examine the determinants of intercorporate investments for a sample of 127 firms listed in the National Stock Exchange (NSE) in India for the period 2015–2019. This research indicates that the investor firm’s intercorporate investments are influenced by free cash flows, dividend yield, promoter holding, and leverage. Interestingly, contrary to anecdotes in the financial press, the investor firms where promoter holding (equity) is more, prefer to invest less in the other firm’s capital (as part of intercorporate investment). Using OLS regression, this analysis does not find evidence for the variables, that is, the firm’s age, the capital expenditure required, growth in earnings per share, board independence, and CEO duality for significant influence on intercorporate investments. Further tests for industry effect reveal the consumer and retail sector’s intercorporate investments to be significantly different (i.e., lower) from the manufacturing and service sectors.

Suggested Citation

  • Vedika Saxena & Seshadev Sahoo, 2020. "Determinants of Intercorporate Investments: An Empirical Investigation of Indian Firms," IJFS, MDPI, vol. 9(1), pages 1-15, December.
    • Handle: RePEc:gam:jijfss:v:9:y:2020:i:1:p:1-:d:466259
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7072/9/1/1/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7072/9/1/1/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lu, Jun & Wang, Wei, 2015. "Board independence and corporate investments," Review of Financial Economics, Elsevier, vol. 24(C), pages 52-64.
    2. Mian, Shehzad L. & Smith, Clifford Jr., 1990. "Incentives for unconsolidated financial reporting," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 141-171, January.
    3. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    4. Holthausen, Robert W., 1990. "Accounting method choice : Opportunistic behavior, efficient contracting, and information perspectives," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 207-218, January.
    5. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    6. Øyvind Bøhren & Øyvind Norli, 1997. "Determinants of Intercorporate Shareholdings," Review of Finance, European Finance Association, vol. 1(2), pages 265-287.
    7. Veronique Mazay & Trevor Wilkins & Ian Zimmer, 1993. "Determinants of the Choice of Accounting for Investments in Associated Companies," Contemporary Accounting Research, John Wiley & Sons, vol. 10(1), pages 31-59, September.
    8. Malmquist, David H., 1990. "Efficient contracting and the choice of accounting method in the oil and gas industry," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 173-205, January.
    9. Whittred, Greg, 1987. "The derived demand for consolidated financial reporting," Journal of Accounting and Economics, Elsevier, vol. 9(3), pages 259-285, December.
    10. Lang, Larry & Ofek, Eli & Stulz, Rene M., 1996. "Leverage, investment, and firm growth," Journal of Financial Economics, Elsevier, vol. 40(1), pages 3-29, January.
    11. Osano, Hiroshi, 1996. "Intercorporate shareholdings and corporate control in the Japanese firm," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 1047-1068, July.
    12. Carpenter, Robert E. & Guariglia, Alessandra, 2008. "Cash flow, investment, and investment opportunities: New tests using UK panel data," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1894-1906, September.
    13. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
    14. Huynh, Toan Luu Duc & Wu, Junjie & Duong, An Trong, 2020. "Information Asymmetry and firm value: Is Vietnam different?," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).
    15. Richard D. Morris & Isabel Gordon, 2006. "Equity accounting adoption in regulated and unregulated settings: an empirical study," Abacus, Accounting Foundation, University of Sydney, vol. 42(1), pages 22-42, March.
    16. Berglof, Erik & Perotti, Enrico, 1994. "The governance structure of the Japanese financial keiretsu," Journal of Financial Economics, Elsevier, vol. 36(2), pages 259-284, October.
    17. Garnsey, Elizabeth, 1998. "A Theory of the Early Growth of the Firm," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 7(3), pages 523-556, September.
    18. El’fred Boo & Divesh Sharma, 2008. "Effect of regulatory oversight on the association between internal governance characteristics and audit fees," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(1), pages 51-71, March.
    19. Øyvind Bøhren & Jørgen Haug, 2006. "Managing Earnings with Intercorporate Investments," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5‐6), pages 671-695, June.
    20. Aivazian, Varouj A. & Ge, Ying & Qiu, Jiaping, 2005. "The impact of leverage on firm investment: Canadian evidence," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 277-291, March.
    21. Pushner, George M., 1995. "Equity ownership structure, leverage, and productivity: Empirical evidence from Japan," Pacific-Basin Finance Journal, Elsevier, vol. 3(2-3), pages 241-255, July.
    22. Øyvind Bøhren & Jørgen Haug, 2006. "Managing Earnings with Intercorporate Investments," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5‐6), pages 671-695, June.
    23. Prowse, Stephen D, 1992. "The Structure of Corporate Ownership in Japan," Journal of Finance, American Finance Association, vol. 47(3), pages 1121-1140, July.
    24. Imen Khanchel, 2007. "Corporate governance: measurement and determinant analysis," Managerial Auditing Journal, Emerald Group Publishing, vol. 22(8), pages 740-760, September.
    25. Flora F. Niu, 2006. "Corporate governance and the quality of accounting earnings: a Canadian perspective," International Journal of Managerial Finance, Emerald Group Publishing, vol. 2(4), pages 302-327, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Balamuralikrishnan Chakkravarthy & Francis Gnanasekar Irudayasamy & Arul Ramanatha Pillai & Rajesh Elangovan & Natarajan Rengaraju & Satyanarayana Parayitam, 2023. "The Relationship between Promoters’ Holdings, Institutional Holdings, Dividend Payout Ratio and Firm Value: The Firm Age and Size as Moderators," JRFM, MDPI, vol. 16(11), pages 1-15, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sai Ding & Alessandra Guariglia & John Knight & Junhong Yang, 2021. "Negative Investment in China: Financing Constraints and Restructuring versus Growth," Economic Development and Cultural Change, University of Chicago Press, vol. 69(4), pages 1411-1449.
    2. Gugler, Klaus, 2003. "Corporate governance, dividend payout policy, and the interrelation between dividends, R&D, and capital investment," Journal of Banking & Finance, Elsevier, vol. 27(7), pages 1297-1321, July.
    3. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    4. Edson Vengesai & Farai Kwenda, 2018. "Cash Flow Volatility and Firm Investment Behaviour: Evidence from African Listed Firms," Journal of Economics and Behavioral Studies, AMH International, vol. 10(6), pages 129-149.
    5. Guo, Hongling & Sun, Yue & Qiu, Xuemei, 2021. "Cross-shareholding network and corporate bond financing cost in China," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    6. Gaurav Gupta & Jitendra Mahakud, 2019. "Alternative measure of financial development and investment-cash flow sensitivity: evidence from an emerging economy," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 5(1), pages 1-28, December.
    7. Ferrando, Annalisa & Preuss, Carsten, 2018. "What finance for what investment? Survey-based evidence for European companies," EIB Working Papers 2018/01, European Investment Bank (EIB).
    8. Ahmad, Muhammad Munir & Hunjra, Ahmed Imran & Taskin, Dilvin, 2023. "Do asymmetric information and leverage affect investment decisions?," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 337-345.
    9. Gugler, Klaus & Mueller, Dennis C. & Yurtoglu, B. Burcin, 2008. "Insider ownership, ownership concentration and investment performance: An international comparison," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 688-705, December.
    10. Annalisa Ferrando & Carsten Preuss, 2018. "What finance for what investment? Survey-based evidence for European companies," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 35(3), pages 1015-1053, December.
    11. Apergis, Nicholas & Chasiotis, Ioannis & Georgantopoulos, Andreas G. & Konstantios, Dimitrios, 2021. "The integration of share repurchases into investment decision-making: Evidence from Japan," International Review of Financial Analysis, Elsevier, vol. 78(C).
    12. Cai, Jie & Zhang, Zhe, 2011. "Leverage change, debt overhang, and stock prices," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 391-402, June.
    13. Matthias Nnadi & Vachiraporn Surichamorn & Ranadeva Jayasekera & Yacine Belghitar, 2022. "Empirical analysis of debt maturity, cash holdings and firm investment in developing economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3345-3372, July.
    14. Canarella, Giorgio & Miller, Stephen M., 2018. "The determinants of growth in the U.S. information and communication technology (ICT) industry: A firm-level analysis," Economic Modelling, Elsevier, vol. 70(C), pages 259-271.
    15. Lyandres, Evgeny, 2007. "Costly external financing, investment timing, and investment-cash flow sensitivity," Journal of Corporate Finance, Elsevier, vol. 13(5), pages 959-980, December.
    16. González, Francisco, 2016. "Creditor rights, bank competition, and corporate investment during the global financial crisis," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 249-270.
    17. Julio Pindado & Chabela De La Torre, 2009. "Effect of ownership structure on underinvestment and overinvestment: empirical evidence from Spain," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(2), pages 363-383, June.
    18. Mateja Gabrijelčič & Uroš Herman & Andreja Lenarčič, 2016. "Firm Performance and (Foreign) Debt Financing before and during the Crisis: Evidence from Firm-Level Data," Working Papers 15, European Stability Mechanism.
    19. Kieran James & Janice How & Peter Verhoeven, 2008. "Did the goodwill accounting standard impose material economic consequences on Australian acquirers?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(4), pages 625-647, December.
    20. Thoa, Tu Thi Kim & Uyen, Nguyen Thi Uyen, 2017. "Banking system reform and investment–cash flow relation: Case of a small transition economy," Research in International Business and Finance, Elsevier, vol. 41(C), pages 500-515.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jijfss:v:9:y:2020:i:1:p:1-:d:466259. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.