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Collection Highlights

Equity Markets in Transition The Value Chain Price

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Price and Financial Stability Rethinking Financial Markets

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Price and Value: A Guide to Equity Market Valuation

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Bayesian risk management a guide to model risk and

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Natural Gas Markets in India Opportunities and Challenges
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Private Equity Fund Investments New Insights on Alignment

of Interests Governance Returns and Forecasting 1st
Edition Cyril Demaria (Auth.)

Innovations in Derivatives Markets Fixed Income Modeling

Valuation Adjustments Risk Management and Regulation 1st
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The deconstruction of equity : activist shareholders,

decoupled risk, and corporate governance First Edition
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Market Integrity Do Our Equity Markets Pass the Test

Robert A. Schwartz
India Studies in Business and Economics

Shveta Singh
P.K. Jain
Surendra Singh Yadav

Equity
Markets in
India
Returns, Risk and Price Multiples
India Studies in Business and Economics
The Indian economy is considered to be one of the fastest growing economies of the
world with India amongst the most important G-20 economies. Ever since the
Indian economy made its presence felt on the global platform, the research
community is now even more interested in studying and analyzing what India has to
offer. This series aims to bring forth the latest studies and research about India from
the areas of economics, business, and management science. The titles featured in
this series will present rigorous empirical research, often accompanied by policy
recommendations, evoke and evaluate various aspects of the economy and the
business and management landscape in India, with a special focus on India’s
relationship with the world in terms of business and trade.

More information about this series at http://www.springer.com/series/11234

Shveta Singh P.K. Jain
•

Surendra Singh Yadav

Equity Markets in India

Returns, Risk and Price Multiples

123
Shveta Singh Surendra Singh Yadav
Department of Management Studies Department of Management Studies
Indian Institute of Technology Delhi Indian Institute of Technology Delhi
New Delhi New Delhi
India India

P.K. Jain
Department of Management Studies
Indian Institute of Technology Delhi
New Delhi
India

ISSN 2198-0012 ISSN 2198-0020 (electronic)

India Studies in Business and Economics
ISBN 978-981-10-0867-2 ISBN 978-981-10-0868-9 (eBook)
DOI 10.1007/978-981-10-0868-9

Library of Congress Control Number: 2016935967

© Springer Science+Business Media Singapore 2016

This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part
of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations,
recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission
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methodology now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publication does not imply, even in the absence of a specific statement, that such names are exempt from
the relevant protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information in this
book are believed to be true and accurate at the date of publication. Neither the publisher nor the
authors or the editors give a warranty, express or implied, with respect to the material contained herein or
for any errors or omissions that may have been made.

Printed on acid-free paper

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The registered company is Springer Science+Business Media Singapore Pte Ltd.
To
the Almighty
and
our family members
Preface

Great deeds are usually wrought at great risk

—Herodotus

Equity markets constitute the most important segment of stock exchanges. In fact,
status of equity returns is, by and large, reckoned as a barometer of the state of the
economy of a country. Returns earned by equity investors on their funds invested in
equity markets would be a decisive factor in the growth of such markets. What has
been the experience of Indian equity markets constitutes the subject matter of this
book.
It would be useful for equity investors to know the expected returns (on a
rational basis) and actual returns earned on their investments; equally important for
them would be to have an insight into the risk-return trade-off involved in equity
investment and the factors that affect the same.
A study comprising, possibly, the largest sample of the National Stock
Exchange’s (NSE) 500 index companies (representing almost 97 % of the market
capitalisation) has not been undertaken so far, in India. The period of the study is
spread over two decades (1994–2014) tracking returns right from the inception
of the index till the present. This book would, provide a comprehensive view of
equity returns in India.
This book would deepen the investor’s understanding of equity investment and,
thus, help him become a more informed investor. Apart from this, this study would
contribute significantly to the existing body of literature on market returns and
prove to be of some value to academic researchers and market participants
(financial institutions and other intermediaries), regulators and policy makers.

vii
Acknowledgements

At the outset, we would like to thank the Almighty for His blessings to inspire us to
accomplish this academic endeavour. This work has been possible because of the
help, encouragement, cooperation and guidance of many people and we convey our
heartfelt thanks to all of them. Special thanks to the Modi Chair Foundation for
funding the research effort. We are grateful to Prof. Kshitij Gupta, Director, IIT
Delhi and Prof. R.K. Shevgaonkar, ex-Director, IIT Delhi, for their encouragement
and support. We express our gratitude towards Prof. M. Balakrishnan (ex-DDF) and
Prof. Sushil, ex-Dean (Faculty), for their unstinting support. Our thanks are also due
to Prof. S.N. Singh (ex-Dean, IRD), Prof. Sunil Tuli, Dean (IRD), Mr. V.K.
Vashistha, AR (IRD), Mr. R.K. Gupta (ex-AR, IRD Accounts), Mr. Anup Kuksal,
AR (IRD Accounts) and IRD staff for their support for our academic endeavour.
To thank the Head of the Department may seem to be a ritual. But it is not so in
the case of Prof. Kanika T. Bhal, Head, Department of Management Studies
(DMS). She has been supportive throughout. We thank Prof. Ravi Shankar for
engaging in discussions from time to time and all our colleagues in the Department
for their good wishes for this endeavour.
We are grateful to our students, Apurv Manvar, and our research scholars,
Monika Singla, Vandana Bhama and Sadaf Anwar, for their help with the data
collection. We thank our student Nishant Vats for his help with data collation and
processing and our research scholar Harshita for preparing the table of contents and
lists of figures, etc.
Dr. Shveta Singh takes this opportunity to express her deepest gratitude to her
gurus and co-authors, Prof. P.K. Jain and Prof. Surendra Singh Yadav, for their
valuable guidance, inspiration, motivation and untiring efforts in completion of this
project. She also thanks Anil, her husband, for his unwavering support and
encouragement. Professor P.K. Jain acknowledges the patience, understanding,
cooperation and encouragement of his wife, Uma.

ix
x Acknowledgements

Last but not least, we are thankful to all those, not mentioned above, who have
helped in carrying out the study, our family members and loved ones for their
continuous encouragement and support.

Shveta Singh
P.K. Jain
Surendra Singh Yadav
Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... . . . . . 1
Section I: Literature Review . . . . . . . . . . . . . . . . . . . . . .... . . . . . 2
Equity Market Studies . . . . . . . . . . . . . . . . . . . . . . . .... . . . . . 2
Factors Affecting Returns . . . . . . . . . . . . . . . . . . . . . .... . . . . . 5
Section II: Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . .... . . . . . 6
Section III: Research Methodology. . . . . . . . . . . . . . . . . .... . . . . . 7
Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... . . . . . 8
NSE 500 Index Background . . . . . . . . . . . . . . . . . . . .... . . . . . 8
Secondary Data and Analysis . . . . . . . . . . . . . . . . . . .... . . . . . 9
Data Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... . . . . . 11
Section IV: Layout of the Study . . . . . . . . . . . . . . . . . . .... . . . . . 12
Section V: Summary . . . . . . . . . . . . . . . . . . . . . . . . . . .... . . . . . 15
Annexure 1.1: Constituent Companies and Sectors of NSE 500
(as on 11 March 2013) . . . . . . . . . . . . . . . . . . . . . . . . . .... ..... 16
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... ..... 28

2 Rates of Return on Equity Funds (ROEF)—Corporates’

Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section I: Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Risk Factors/Determinants Affecting ROE . . . . . . . . . . . . . . . . . . . 34
Impact of Recent Financial Crisis on India . . . . . . . . . . . . . . . . . . 34
Section II: Scope, Data and Methodology . . . . . . . . . . . . . . . . . . . . . 35
Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
NSE 500 Index Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Secondary Data and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Data Sources and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section III: Rates of Return from the Company’s
Perspective—ROEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........ 38
Section IV: Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . ........ 42
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........ 43

xi
xii Contents

3 Expected Rates of Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section I: Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section II: Scope, Data and Methodology . . . . . . . . . . . . . . . . . . . . . 50
Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
NSE 500 Index Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Secondary Data and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section III: Expected Rates of Return Based on Capm . . . . . . . . . . . . 52
Section IV: Expected Rates of Return—Cost of Equity . . . . . . . . . . . . 55
Section V: Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

4 Rates of Return—Investors’ Perspective . . . . . . . . . . . . . . . . . . . . 65

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section I: Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Factors Affecting Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Behaviour of Share Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section II: Scope, Data and Methodology . . . . . . . . . . . . . . . . . . . . . 70
Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
NSE 500 Index Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Secondary Data and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Section III: Portfolio Returns for Varied Holding Periods . . . . . . . . . . 74
Section IV: Overall Characteristics of Returns . . . . . . . . . . . . . . . . . . 79
Periods of High Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Periods of Low Returns and Losses . . . . . . . . . . . . . . . . . . . . . . . 81
Magnitude of Variations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Three Phases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Two Components of Total Return . . . . . . . . . . . . . . . . . . . . . . . . 82
Declining Importance of Dividend . . . . . . . . . . . . . . . . . . . . . . . . 82
Comparison with Debt Instruments. . . . . . . . . . . . . . . . . . . . . . . . 83
Section V: Concluding Observations. . . . . . . . . . . . . . . . . . . . . . . . . 86
Annexure 4.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Example of Bonus Share Adjustment . . . . . . . . . . . . . . . . . . . . . . 87
Example for Rights Issue Adjustment . . . . . . . . . . . . . . . . . . . . . . 89
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

5 Rates of Return—Disaggregative Analysis . . . . . . . . . . . . . . . . . . . 93

Section I: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Ownership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Underlying Sector/Industry Affiliation. . . . . . . . . . . . . . . . . . . . . . 96
Section II: Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Section III: Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Contents xiii

Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......... 97
NSE 500 Index Background . . . . . . . . . . . . . . . . . . .......... 98
Secondary Data and Analysis . . . . . . . . . . . . . . . . . .......... 98
Section IV: Returns Based on the Age, Size, Ownership
Structure and Underlying Sector/Industry Affiliation
of Sample Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Ownership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Underlying Sector/Industry Affiliation. . . . . . . . . . . . . . . . . . . . . . 113
Section V: Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

6 Analysis of Price Multiples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Section I: Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Section II: P/E Ratios in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Interpreting the P/E Ratio: A Word of Caution . . . . . . . . . . . . . . . 130
Earnings Per Share (EPS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Relationship Between EPS and Prices. . . . . . . . . . . . . . . . . . . . . . 131
P/B Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Section III: Scope, Data and Methodology . . . . . . . . . . . . . . . . . . . . 131
Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
NSE 500 Index Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Secondary Data and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Section IV: Price Multiples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Section V: Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

7 Volatility in Stock Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Section I: Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
International Studies on Behaviour of Returns . . . . . . . . . . . . . . . . 146
Indian Studies on Behaviour of Returns . . . . . . . . . . . . . . . . . . . . 148
Section II: Scope, Data and Methodology . . . . . . . . . . . . . . . . . . . . . 148
Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
NSE 500 Index Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Secondary Data and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Formulation of Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Section III: Index Returns and Their Statistical Treatment . . . . . . . . . . 153
Section IV: Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Annexure 7.1: Glossary of Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Annexure 7.2: Ljung-Box Q2 Statistics . . . . . . . . . . . . . . . . . . . . . . . 157
xiv Contents

Annexure 7.3: Lagrange Multiplier Test . . . . . . . . . . . . . . . . . . . . . . 157

Annexure 7.4: Stationarity Test Statistics . . . . . . . . . . . . . . . . . . . . . 158
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

8 Level of Market Efficiency Using ‘Rational Bubbles’ Approach . . . 161

Section I: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Section II: Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Rational Bubbles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Share Price Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Section III: Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
NSE 500 Index Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Secondary Data and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Section IV: Statistical Models Used to Test the Presence
of ‘Rational Bubbles’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
Unit Root Test. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Tests for Cointegration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
Section V: Results and Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . 172
Unit Root Test. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
Threshold Autoregressive (TAR) Test . . . . . . . . . . . . . . . . . . . . . . 173
Momentum-Threshold Autoregressive (M-TAR) Test . . . . . . . . . . . 173
M-TAR Error Correction Model. . . . . . . . . . . . . . . . . . . . . . . . . . 173
Section VI: Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
Annexure 8.1: Brief Definition of Theories and Terms . . . . . . . . . . . . 175
Annexure 8.2: Augmented Dickey–Fuller (ADF) Test Results . . . . . . . 176
Annexure 8.3: Results of TAR Cointegration Test . . . . . . . . . . . . . . . 176
Annexure 8.4: Estimation Results of M-TAR Error
Correction Model (ECM) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... 176
Annexure 8.5: Summary and Diagnostic Checking
for M-TAR Models (1 and 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Annexure 8.6: Granger Causality and Path Asymmetry Test . . . . . . . . 177
Annexure 8.7: Engle–Granger Test Results . . . . . . . . . . . . . . . . . . . . 177
Annexure 8.8: ARDL Bound Test Results. . . . . . . . . . . . . . . . . . . . . 178
Annexure 8.9: Johansen–Juselius Test Results . . . . . . . . . . . . . . . . . . 178
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

9 Concluding Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

Section I: Returns on Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
Section II: Analysis of Price Multiples . . . . . . . . . . . . . . . . . . . . . . . 185
Section III: Risk/Volatility in Returns . . . . . . . . . . . . . . . . . . . . . . . . 186
Section IV: Level of Market Efficiency. . . . . . . . . . . . . . . . . . . . . . . 186
Section V: Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
About the Authors

Shveta Singh is an Associate Professor of Finance at the Department of

Management Studies, Indian Institute of Technology (IIT Delhi), India. She teaches
courses on managerial accounting and financial management, indian financial
system and security analysis and portfolio management. Recently, she has devel-
oped a course on corporate governance and has also received training by the
International Finance Corporation (IFC) in collaboration with the Indian Institute of
Corporate Affairs (IICA), for the same. She has contributed to various consulting
assignments for organizations like the Directorate General of Supplies & Disposals
(DGS&D) and the National Buildings Construction Corporation (NBCC).
Overall, she has more than a decade of professional experience, having spent 3
years in the corporate sector prior to joining academics. She has published research
papers in journals of national and international repute. She has been honoured with
the “Leadership” award which she accepted on behalf of IIT Delhi from the Institute
of Business and Finance Research at the Global Conference on Business and
Finance in USA. She also won the “Best in Session” award at the same conference.
She was also honoured with the “Literati” award for outstanding research by
Emerald Publishing Inc. She also received a mention for the “Most Downloaded
Paper” by the Journal of Advances in Management Research, UK.
P.K. Jain is a Professor of Finance at the Department of Management Studies, IIT,
Delhi. He has earlier served as the Co-ordinator of the Dalmia Research Programme
on Management in Asia and also as the Modi Foundation Chair Professor.
He has a teaching experience of more than 40 years in subjects related to
management accounting, financial management, financial analysis, cost analysis
and cost control. His research is primarily focused in the area of corporate finance.
He has authored/co-authored more than 11 textbooks and 14 research
books/monographs. An empiricist, he investigates applied problems using
real-business data to have the managerial implications of various financial aspects.
He has published more than 160 research papers in the journals of national and
international reputation. Recently, his paper “Capital Budgeting Decisions:
Evidence from India” has been adjudged with the “Literati Award” by Emerald for

xv
xvi About the Authors

Outstanding Excellence in Research. He is on the board of academic institutions

and reviewer of journals like Vision, Abhigyan, Vikalp, Finance India,
Management and Change.
Surendra Singh Yadav is currently a Professor at the Department of Management
Studies, IIT, Delhi. He teaches corporate finance, international finance, international
business, and security analysis & portfolio management. He has been a visiting
professor at University of Paris, Paris School of Management and INSEEC Paris
France, and University of Tampa, USA.
Professor Surendra Singh Yadav has published 14 books. He has contributed
more than 130 papers in research journals and about six dozen papers in
conferences/seminars. He has contributed more than 30 articles in
financial/economic newspapers. He has done several sponsored research and con-
sultancy projects for industry and government. Professor Yadav is the
editor-in-chief of the Journal of Advances in Management Research (JAMR),
published by Emerald, UK, in collaboration with IIT Delhi. He has been on a large
number of expert committees as a member or chairman within the institute as well
as outside. He has travelled to several countries such as France, UK, Switzerland,
Belgium, Italy, Netherlands, Singapore and USA.
Abbreviations

ADF Augmented Dickey–Fuller test

ADR American Depository Receipts
AE Abnormal Earnings
AIC Akaike Information Criteria
ANFN Adaptive Neural-Fuzzy Networks
ANOVA Analysis of Variance
APARCH Asymmetric Power Autoregressive Conditional Heteroskedasticity
ARCH Autoregressive Conditional Heteroskedasticity
ARDL Autoregressive Distributed Lag test
ARIMA Autoregressive Integrated Moving Average
β Beta
BE Brand Equity
BEML Bharat Earth Movers Limited
BRIC Brazil, Russia, India and China
BRICA Brazil, Russia, India, China and Argentina
BSE Bombay Stock Exchange
BV/MV Book Value to Market Value
CAPM Capital Asset Pricing Model
CART Classification and Regression Tree
CEO Chief Executive Officer
CFO Chief Financial Officer
CRISIL Credit Rating Information Services of India Limited
CRSP Centre for Research in Security Prices
CS Customer Satisfaction
DCL Degree of Combined Leverage
DF Dickey Fuller test
DFL Degree of Financial Leverage
DOL Degree of Operating Leverage
Dp Preference Dividend
D/P Dividend Pay-out ratio
DPS Dividend per Share

xvii
xviii Abbreviations

DSE Dhaka Stock Exchange

EAT Earnings after Taxes
EBIT Earnings before Interest and Taxes
ECM Error-Correction Model
EGARCH Exponential General Autoregressive Conditional Heteroskedasticity
E/P Earnings-to-Price ratio
EPS Earnings per Share
EW Equal Weighted
E&Y Ernst and Young
FD Fixed Deposit
FDI Foreign Direct Investment
GAAP Generally Accepted Accounting Principles
GARCH General Autoregressive Conditional Heteroskedasticity
GARCH-M General Autoregressive Conditional Heteroscedasticity-Mean
GCC Gulf Cooperation Council
GDP Gross Domestic Product
GSADF Generalized Supremum Augmented Dickey–Fuller test
ICT Internet, Communications Technology
IGARCH Integrated Generalized Autoregressive Conditional
Heteroscedasticity
IISL India Index Services and Products Limited
IMF-FSF International Monetary Fund-Financial Stability Forum
INR Indian Rupee
IPO Initial Public Offering
IRR Internal Rate of Return
IVP Indira Vikas Patra
J–J Johansen–Juselius test
Ke Cost of Equity
KPSS Kwiatkowski–Phillips–Schmidt–Shin statistics
KSE Karachi Stock Exchange
KVP Kisan Vikas Patra
LDA Linear Discriminant Analysis
MPS Market Price per Share
M-TAR Momentum-Threshold Autoregression test
NASDAQ National Association of Securities Dealers Automated Quotations
NSC National Savings Certificates
NSE National Stock Exchange
NYSE New York Stock Exchange
OECD Organization for Economic Cooperation and Development
OLS Ordinary Least Squares
P/B Price-to-Book-Value ratio
P/E Price-to-Earnings ratio
P–P Philips–Perron statistics
PPF Public Provident Fund
PSU Public Sector Undertaking
Abbreviations xix

PwC PricewaterhouseCoopers
QDA Quadratic Discriminant Analysis
QMLI Quasi-Maximum Likelihood Estimation
Q–Q Quantile–Quantile
RBI Reserve Bank of India
Rf Risk-Free Return
Rm Market Return
ROE Return on Equity
ROEF Return on Equity Funds
ROR Rate of Return
S&P Standard & Poor’s
SADF Supremum Augmented Dickey–Fuller test
SEBI Securities and Exchange Board of India
SEC Securities and Exchange Commission
SENSEX Sensitive Index
SG Sales Growth
SIC Schwarz–Bayesian Information Criteria
SPSS Statistical Package for Social Sciences
SV Shareholder Value
TAR Threshold Autoregressive test
TARCH Threshold Autoregressive Conditional Heteroskedasticity
TASE Tel Aviv Stock Exchange
TDS Thomson Datastream
UK United Kingdom
ULIPs Unit Linked Insurance Plans
UNCTAD United Nations Council for Trade and Development
USA United States of America
VaR Value at Risk
V/P Value-to-Price ratio
WTO World Trade Organization
List of Figures

Figure 2.1 Mean values of ROEF for sample companies,

2004–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 40
Figure 3.1 Mean values of operating leverage of the sample
companies, 2001–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . .. 59
Figure 3.2 Mean values of financial leverage of the sample companies,
2001–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Figure 4.1 Rates of return for the fifteen-year holding period . . . . . . . . . 78
Figure 4.2 Rates of return for the ten-year holding period . . . . . . . . . . . 79
Figure 4.3 Rates of return for the five-year holding period . . . . . . . . . . . 80
Figure 4.4 Rates of return for the one-year holding period . . . . . . . . . . . 81
Figure 4.5 Twenty-five years of bank interest rates in India (source
Capitalmind website 2014) . . . . . . . . . . . . . . . . . . . . . . . .. 84
Figure 5.1 Segregation of the sample companies on the basis of age . . .. 94
Figure 5.2 Segregation on the basis of ownership structure of sample
companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 95
Figure 6.1 Mean values of P/E ratio for sample companies,
2001–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 137
Figure 6.2 Mean values of P/B ratio for sample companies,
2001–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 141
Figure 7.1 Histogram of the NSE 500 daily returns, 1999–2014 . . . . . .. 153
Figure 7.2 Time Path of the NSE 500 daily closing prices,
1999–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 154
Figure 7.3 Volatility patterns (deviations) of the NSE 500 index based
on daily closing prices, 1999–2014 . . . . . . . . . . . . . . . . . .. 154
Figure 7.4 Q–Q plot of daily closing prices of the NSE 500 index,
1999–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 155

xxi
List of Tables

Table 1.1 Sector-wise classification of NSE 500 companies . . . . . . . .. 9

Table 1.2 Sector-wise reclassification of sample companies . . . . . . . . .. 13
Table 2.1 Mean, standard deviation, coefficient of variation,
skewness, kurtosis, median and quartile values related to
return on equity funds (ROEF) of sample companies,
2004–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 39
Table 2.2 Frequency distribution related to ROEF of sample
companies, 2004–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . .. 41
Table 3.1 Expected returns for the sample companies and their
comparison with market index returns for the period,
2001–2014 (figures are in percentage) . . . . . . . . . . . . . . . .. 53
Table 3.2 Mean, standard deviation, variance, coefficient of variation,
minimum, maximum, skewness, kurtosis and quartile
values of expected and market index returns,
2001–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 53
Table 3.3 Mean, standard deviation, coefficient of variation,
skewness, kurtosis, median and quartile values of degree of
operating leverage (DOL) and degree of financial leverage
(DFL) of sample companies, 2001–2014 . . . . . . . . . . . . . .. 56
Table 3.4 Frequency distribution pertaining to the degree of operating
leverage (DOL) and degree of financial leverage (DFL) of
sample companies, 2001–2014 (figures are in
percentages) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 58
Table 3.5 Assignment of risk premium rate for DOL and DFL . . . . . .. 60
Table 3.6 Cost of equity based on the risk premium approach . . . . . . .. 60
Table 4.1 Rates of return for the fifteen-year holding period
(when equities were purchased at the year’s average price
and then sold 15 years later, at the terminal year’s average
price) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 75

xxiii
xxiv List of Tables

Table 4.2 Rates of return for the ten-year holding period

(when equities were purchased at the year’s average price
and then sold 10 years later, at the terminal year’s average
price) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 75
Table 4.3 Rates of return for the five-year holding period
(when equities were purchased at the year’s average price
and then sold 5 years later, at the terminal year’s average
price) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 76
Table 4.4 Rates of return for the one-year holding period . . . . . . . . . .. 77
Table 4.5 Comparison of different investment avenues—2015 . . . . . . .. 85
Table 5.1 Mean, minimum, maximum, standard deviation, coefficient
of variation, skewness, kurtosis, median and quartile values
related to the age of sample companies . . . . . . . . . . . . . . .. 101
Table 5.2 Mean, minimum, maximum, standard deviation, coefficient
of variation, skewness, kurtosis, median and quartile values
related to the size of sample companies . . . . . . . . . . . . . . .. 102
Table 5.3 Sector-wise reclassification of sample companies . . . . . . . . .. 103
Table 5.4 Weighted annual average returns and statistics of mean,
standard deviation, variation, coefficient of variation,
skewness, kurtosis and quartile values of returns on the
basis of age of sample companies, 2001–2014 . . . . . . . . . .. 106
Table 5.5 Weighted annual average returns and statistics of mean,
standard deviation, variation, coefficient of variation,
skewness, kurtosis and quartile values of returns on the
basis of size of sample companies, 2001−2014 . . . . . . . . . .. 110
Table 5.6 Weighted annual average returns and statistics of mean,
standard deviation, variation, coefficient of variation,
skewness, kurtosis and quartile values of returns on the
basis of ownership structure of sample companies,
2001−2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 114
Table 5.7 Weighted annual average returns and statistics of mean,
standard deviation, variation, coefficient of variation,
skewness, kurtosis and quartile values of returns on the
basis of underlying sector of sample companies,
2001−2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 117
Table 6.1 Interpretation of P/E ratios . . . . . . . . . . . . . . . . . . . . . . . .. 134
Table 6.2 Frequency distribution related to P/E ratio of sample
companies, 2001–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . .. 135
Table 6.3 Mean, standard deviation, coefficient of variation,
skewness, kurtosis, median and quartile values related to
P/E ratio of sample companies 2001–2014 . . . . . . . . . . . . .. 136
Table 6.4 Growth in EPS vis-à-vis P/E multiples for sample
companies, 2001–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . .. 138
List of Tables xxv

Table 6.5 Frequency distribution related to P/B ratio of sample

companies, 2001–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . .. 139
Table 6.6 Mean, standard deviation, coefficient of variation,
skewness, kurtosis, median and quartile values related to
P/B ratio of sample companies 2001–2014 . . . . . . . . . . . . .. 140
Table 7.1 Mean, standard deviation, variance, kurtosis, skewness and
range in daily returns of the NSE 500, 1999–2014 . . . . . . .. 153
Table 8.1 Descriptive statistics of log (price) and log (dividends). . . . .. 168
Table 8.2 Results of M-TAR cointegration test . . . . . . . . . . . . . . . . .. 173
List of Annexures

Annexure 1.1 Constituent Companies and Sectors of NSE 500

(as on 11 March 2013) . . . . . . . . . . . . . . . . . . . . . . . . . 16
Annexure 4.1 Example of Bonus Share Adjustment . . . . . . . . . . . . . . . 87
Example for Rights Issue Adjustment . . . . . . . . . . . . . . . . . .89
.....
Annexure 7.1 Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Annexure 7.2 Ljung-Box Q2 Statistics . . . . . . . . . . . . . . . . . . . . . . . . . 157
Annexure 7.3 Lagrange Multiplier Test . . . . . . . . . . . . . . . . . . . . . . . . 157
Annexure 7.4 Stationarity Test Statistics . . . . . . . . . . . . . . . . . . . . . . . 158
Annexure 8.1 Brief Definition of Theories and Terms . . . . . . . . . . . . . . 175
Annexure 8.2 Augmented Dickey–Fuller (ADF) Test Results . . . . . . . . . 176
Annexure 8.3 Results of TAR Cointegration Test . . . . . . . . . . . . . . . . . 176
Annexure 8.4 Estimation Results of M-TAR Error Correction Model
(ECM). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 176
Annexure 8.5 Summary and Diagnostic Checking for M-TAR Models
(1 and 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Annexure 8.6 Granger Causality and Path Asymmetry Test . . . . . . . . . . 177
Annexure 8.7 Engle–Granger Test Results . . . . . . . . . . . . . . . . . . . . . . 177
Annexure 8.8 ARDL Bound Test Results . . . . . . . . . . . . . . . . . . . . . . 178
Annexure 8.9 Johansen–Juselius Test Results . . . . . . . . . . . . . . . . . . . . 178

xxvii
Chapter 1
Introduction

Equity markets constitute the most important segment of stock exchanges; in fact,
status of equity returns is, by and large, reckoned as a barometer of the state of the
economy of a country. Returns earned by equity investors on their funds invested in
equity markets would be a decisive factor in the growth of such markets. What has
been the experience of Indian equity markets constitutes the subject matter of the
present research monograph.
Therefore, it would be useful for equity investors to know the expected returns
(on a rational basis) and actual returns earned on their equity investments; equally
important would be to have insight related to the risk–return trade-off involved in
equity investment and the parameters that may affect the same.
There is a dearth of recent and systematic data on returns earned from investing
in the Indian equities. Perhaps the first formal exercise to analyse data in this regard
was conducted by Gupta (1981) in his study entitled ‘Rates of Return on Equities:
The Indian Experience’, based on the 16-year period, 1960–1976. He extended his
research endeavour and published a monograph titled ‘Returns on Indian Equity
Shares’, presenting equity returns over the period 1980–1999. More than one and a
half decades have elapsed since its completion, and there appears to be no recent
research effort to study returns on equity shares. This research monograph is an
attempt to fill not only this gap but also go beyond the stated objectives of previous
researches.
Since 2000, the market conditions have undergone substantial changes and
financial markets worldwide have witnessed continual upheavals. Further, to the
best of the knowledge of the authors, even though there have been a large number
of empirical studies on equity returns, they have focused on one or two specific
aspects. Therefore, the broad objective of this research effort titled ‘Equity Markets
in India: Returns, Risk and Price Multiples’ is to present a comprehensive view of
the Indian equity returns for the past two decades (1994–2014). For better expo-
sition, this chapter is divided into five sections. Section “Literature Review” con-
tains the summarized literature review. The objectives of the study undertaken have

© Springer Science+Business Media Singapore 2016 1

S. Singh et al., Equity Markets in India, India Studies
in Business and Economics, DOI 10.1007/978-981-10-0868-9_1
2 1 Introduction

been delineated in section “Objectives”. Section “Research Methodology” contains

the broad research methodology followed, and section “Layout of the Study”
presents the layout of the study. Section “Summary” contains the summary.

Section I: Literature Review

For better comprehension, the literature review has been split between two sub-
themes, viz. equity market studies (both international and Indian) and the factors
affecting equity returns and risk.

Equity Market Studies

Sehgal and Balakrishnan (2002) evaluated the presence of systematic patterns in

stock returns for the Indian stock markets. The results, in general, were in con-
formity with those for the developed capital markets. Bekaert et al. (2002) studied
the effect of liberalization on four variables, viz. the interest rates, net equity capital
flows, returns and the dividend yields for the regions of Latin America and Asia.
Lee and Saltoglu (2002) analysed the predictive performances of a selection of
value-at-risk (VaR) models for the Japanese stock market for the period 1984–2000.
Pandey (2003) compared the performance of the various unconditional volatility
estimators and conditional volatility models using the time series data of the Nifty
index. Jun et al. (2003) studied the behaviour of liquidity in emerging markets for
the period 1992–1999. Batra (2004) studied the time variations in volatility and its
persistence in the Indian stock market during 1979–2003. Azarmi et al. (2005)
examined the empirical association between stock market development and eco-
nomic growth for a period of 10 years around the Indian market ‘liberalization’
event (1991).
Dey (2005) deliberated on the effect of economic growth on the portfolio liq-
uidity of global stock exchanges. Belter et al. (2005) presented a new
dividend-adjusted blue-chip index for the Danish stock market covering the period
1985–2002. Ince and Porter (2006) compared US equity return data from the
Thomson Datastream (TDS) database with similar data from the Centre for
Research in Security Prices (CRSP) database to evaluate the TDS database for use
in studies involving a large number of individual equities in markets outside the
USA. Hamza et al. (2006) examined two alternatives to the capitalization-weighted
index for emerging markets, viz. the gross domestic product (GDP)-weighted and
the equal-weighted (EW) indices. Keasey and McGuinness (2008) analysed three
factors underlying the valuation of initial public offering (IPO) firms within the
Hong Kong stock market, viz. the percentage of equity retained by prelisting share
Section I: Literature Review 3

owners, the decision to disclose prospective earnings’ forecast and the level of IPO
underpricing. Attig et al. (2008) observed that the cost of equity and the agency
costs decreased with the presence (and voting numbers) of large shareholders.
Pan and Sinha (2008) studied the return distributions of several indices from the
Indian stock market. Mariani et al. (2008) conducted an empirical study of the
statistical behaviour of the leading Indian market indices versus the indices of the
similarly developing markets of Taiwan and China as well as compared them also
with developed markets (i.e. the Standard & Poor’s (S&P) 500 index of the USA).
Shapira et al. (2009) analysed the functional role of a market index by comparing
the results of the New York Stock Exchange (NYSE) and the Tel Aviv Stock
Exchange (TASE). Tabaka et al. (2009) recorded the price fluctuations in the
Brazilian stock market and tested whether the Brazilian stock returns exhibited a
power law distribution. Bhar and Nikolova (2009) examined the level of integration
amongst the Brazil, Russia, India and China (BRIC) countries and the rest of the
world. Majumder (2012) studied the BRIC markets and compared them with that of
the USA. On similar lines, Aktan et al. (2009) analysed the market indices of Brazil,
Russia, India, China and Argentina (BRICA) and compared their relationships with
the American market for the period 2002–2009.
Kumar and Deo (2009) studied the multifractal properties of the logarithmic
returns of the Indian financial indices of the Bombay Stock Exchange (BSE) and
the National Stock Exchange (NSE). On similar lines, Liu et al. (2010) analysed the
sources of multifractality over time for the Shenzhen stock market. Zunino et al.
(2010) employed the complexity–entropy causality plane to distinguish amongst the
stages of stock market development. Ansari et al. (2010) identified factors con-
tributing to uncertainties during the recession period using statistical analysis,
econometrical analysis and adaptive neural fuzzy networks (ANFN) on the National
Association of Securities Dealers Automated Quotations (NASDAQ) stock market.
Aityan et al. (2010) analysed the degree of global integration between the stock
markets of different countries and their influence on each other. More specifically,
Paul and Bhajanka (2010) documented the degree of integration of the Indian stock
market with the international stock markets. Soni and Shrivastava (2010) classified
the Indian stock market data using the combination of three supervised machine
learning algorithms, classification and regression tree (CART), linear discriminant
analysis (LDA) and quadratic discriminant analysis (QDA).
Mishra et al. (2010) applied a threshold autoregressive (TAR) model on 11-year
weekly data for two indices and ten common stocks from the NSE. Karmakar
(2010) studied return and volatility spillover effects between large and small stocks
in the NSE. Nyberg and Vaihekoski (2010) developed a new monthly,
value-weighted, total return index for the Finnish stock market that covered the
period from the setting up of the Helsinki Stock Exchange in 1912 till 1970, after
which another index became available. Joshi (2010) undertook the study of stock
market volatility in the emerging markets of India and China, using daily closing
prices, from 2005 to 2009. Bhaduri and Saraogi (2010) analysed the relationship
4 1 Introduction

between yield spread and stock market returns. Dicle et al. (2010) evaluated the
emerging Indian market for its efficiency and potential to offer diversification
benefits to international investors. Tripathy (2010) studied the expiration day and
week effects for Nifty futures by using the Kruskal–Wallis test for the period
2007–2009. Lao and Singh (2011) deliberated on the herding behaviour in the
Chinese and Indian stock markets.
Ng et al. (2011) studied the impact of the 2003 Securities and Exchange
Commission (SEC) regulation, requiring shareholder approval for all equity-based
executive compensation plans. Kim et al. (2011) analysed whether the chief exec-
utive officer (CEO) and the chief financial officer (CFO) equity incentives were
associated with the firm-specific future stock price crash risk. Cuoco and Kaniel
(2011) reported that the benchmark stocks had lower expected returns, lower Sharpe
ratios and higher volatilities when compared with similar non-benchmark stocks.
John et al. (2011) assessed the impact of geography on agency costs and firm
dividend policies. Guresen et al. (2011) evaluated the effectiveness of applying
neural network models in stock market predictions. Walid et al. (2011) deployed a
Markov-switching exponential general autoregressive conditional heteroscedastic
(EGARCH) model to study the dynamic linkage between stock price volatility and
exchange rate changes for 4 emerging countries’ markets over the period 1994–2009.
Bayar et al. (2011) developed a theory on new project financing and equity
carve-outs under heterogeneous beliefs amongst investors in the equity market.
Alagidede (2011) examined the stock return predictability in Africa’s emerging
equity markets. Mishra et al. (2011a, b) tested the presence of nonlinear dependence
and deterministic chaos in the rates of return of six Indian stock market indices.
Further, Mishra et al. (2011a, b) demonstrated how optimization procedures could
be put into practice in the context of the Bombay Stock Exchange (BSE). Maher
and Parikh (2011) examined the short-term behaviour of three Indian stock market
indices in response to informational shocks. Kumar et al. (2011) analysed the effect
of global competition for order flows on the local market which arose due to the
listing of American Depository Receipts (ADRs) by six Indian firms on the NYSE.
Kenourgios et al. (2011) studied the financial contagion in the BRIC markets and
two developed markets [the USA and the UK], over the past five financial crises.
Durai and Bhaduri (2011) calculated the correlation statistics of the equity market
of India with other countries, using daily price data from 1997 to 2006. Yuksel and
Bayrak (2012) analysed the relationship between the cyclical behaviour of stock
market indices of the manufacturing, service, finance and technology sectors at the
Istanbul Stock Exchange and the GDP of Turkey for the period 1998–2011.
Annaert et al. (2012) introduced a new monthly return index based on the
Brussels stock market data for the period 1832–1914. Raghvan and Sarwono (2012)
studied the development of the corporate bond market in India, identified the factors
which had influenced its development and suggested policy reforms to enhance its
development. Krishnan and Mishra (2012) analysed liquidity patterns to detect any
commonality across liquidity measures, using one-year intraday data at the NSE.
Section I: Literature Review 5

Factors Affecting Returns

Lau et al. (2002) analysed the relationships between stock returns and six parame-
ters, viz. beta, size, the earnings-to-price (E/P) ratio, the cash flow-to-price ratio, the
book-to-market price ratio and sales growth (SG) on the data of the Singapore and
Malaysian stock markets for the period 1988–1996. Trueman et al. (2003) presented
evidence of anomalies in the Internet firms’ stock returns around announcements of
their quarterly earnings. Xing and Howe (2003) applied a bivariate GARCH model
to the weekly stock index returns from the UK; they documented a significant
positive relationship between returns and its variance. Ho et al. (2006) analysed
empirically the pricing effects of beta, firm size and book-to-market price using the
Hong Kong stock market data. On similar lines, Morelli (2007) analysed the role of
beta, size and book-to-market equity as competing risk measurements in explaining
the cross-sectional returns of the UK stock market for the period 1980–2000.
Shivakumar (2007) analysed the relationship amongst aggregate earnings, stock
market returns and the macroeconomy. Marisetty et al. (2008) studied the security
price reactions to announcements of rights issues by listed Indian firms during the
period 1997–2005. Lally and Swidler (2008) deliberated on the relationship
between the market weight of a single stock and the betas of both stock and the
residual portfolio taking the case of Nokia and the Finnish market for the period
1993–2004. Kozaki and Sato (2008) applied the Beck model (developed for tur-
bulent systems that exhibited scaling properties) to stock markets. Rao and Thakur
(2008) assessed the optimal hedge ratio and hedge efficiency by employing the
Box–Jenkins autoregressive, integrated moving average (ARIMA) technique.
Maniar et al. (2009) analysed the effect of expiration day of the index futures and
options on the trading volume, variance and price of the underlying shares.
Similarly, Debasish (2009) deliberated on the effect of futures trading on the
volatility and the operating efficiency of the underlying Indian stock market.
Mahajan and Singh (2009) examined the empirical relationships amongst return,
volume and volatility dynamics by using daily data of the sensitive index (Sensex)
for the period 1996–2006. The findings of Alti and Sulaeman (2011) suggested that
the companies issued new shares when high stock returns coincided with strong
demand from institutional investors. Ferreira and Santa-Clara (2011) analysed data
from 1927 to 2007 in order to forecast the components of stock market returns.
Torres and Tribó (2011) explored the interaction between the shareholder value
(SV) and customer satisfaction (CS), as well as their impact on a firm’s brand equity
(BE) by employing panel data pertaining to 69 firms from 11 nations during the
period 2002–2005. Berkman et al. (2011) conducted research on a sample of major
international political crises to test the link between changes in disaster risk and
subsequent changes (if any) in stock market prices.
Butler et al. (2011) explored the distinction between the composition effect and
the net financing. Khansa and Liginlal (2011) analysed the effects of malicious
attacks on the stock market returns of information security firms. Todorova and
6 1 Introduction

Vogt (2011) analysed stock data to test whether the power law hypothesis held for
the sample stocks. Dichev and Yu (2011) used dollar-weighted returns to assess the
properties of actual investor returns on hedge funds and compared them to the
buy-and-hold fund returns. Hong and Yogo (2012) analysed whether open interest
could be more informative than futures prices in the presence of hedging demand
and limited risk absorption capacity in futures markets. Johnson and So (2012)
studied the information content of the options and equity volumes when the trading
brokers were privately informed and the trade direction was unobserved. Bansal and
Khanna (2012) analysed the differences in the level of underpricing of IPOs that
were priced through the book-building method vis-a-vis those that were priced
through the fixed-price method. Savor (2012) explored how information presence
affected post-event performance of stocks (experiencing large price changes).
Becker et al. (2013) tested the prediction; namely, when corporate payout was
taxed, internal equity (retained earnings) was cheaper than external equity (share
issues). Yalama and Celik (2013) examined whether real or spurious long-term
memory characteristics of volatility were present in stock market data. Li (2013) in
his findings states that there is a nonlinear wealth transfer from shareholders to
creditors causing shareholder loss. Campello and Graham (2013) studied the capital
investment, stock issuance and cash saving behaviour of non-technology-intensive
manufacturers during the 1990’s technology bubble.
From the aforementioned literature review, it is evident that researchers (the
world over) have focused on one or the other aspect of rates of return on equities;
there is not even a single study which has dealt with returns earned on equity funds
by corporate enterprises. This is perhaps the first study which aims at determining
the rates of return earned on equity investments by the corporate enterprises; the
other contribution of the study is to provide update to Gupta’s work on Rates of
Return on Equities; the notable features of the present work, amongst others, would
be to highlight also the risk–return trade-off, from the perspective of equity
investors.

Section II: Objectives

The objectives of this study are to cover virtually all the major aspects of equity
returns. It is intended to deepen the investor’s understanding of equity investment
and, thus, help him to become a more informed investor. Moreover, apart from the
investor community (both individual and institutional investors), this monograph,
we believe, would contribute significantly to the existing body of literature on
market returns and prove to be of some value to academicians, researchers and
market participants (financial institutions, other intermediaries) regulators and
policy makers. The present study is thus much wider in scope than the one
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