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` Annual200/-ISSN 2320 –1584 EIRC News
Vol. 9 No. 09 October, 2016
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EIRC NEWSThe Institute of Cost Accountants of India
Bally Jora Aswatthatala Vidyalaya on 17.08.2016 Madhyamgram High School on 19.08.2016
Narayanpur Haricharan Tarafdar High School on23.08.2016
Shyamnagar Kanti Chandra High School on23.08.2016
Geonkhali High School on 24.08.2016 Mahisadal Raj High School on 24.08.2016
Career Awareness Programme
EIRC of ICAIChairman
Vice-Chairman
Secretary
Treasurer
Members
(R.C.M)
(R.C.M)
(R.C.M)
(R.C.M)
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CMA Bibekananda Mukhopadhyay
CMA Pranab Kumar Chakraborty
CMA Ashis Banerjee
CMA Cheruvu Venkata Ramana
CMA Shyamal Kr Bhattacharjee
CMA (Dr.) Umar Farooque
CMA Shiba Prasad Padhi
CMA Arundhati Basu
CMA Manas Kumar Thakur
CMA Avijit Goswami
CMA Niranjan Mishra
CMA Biswarup Basu
P. Banerjee
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Contents
DisclaimerThe views and opinions expressed or implied by way of articles in the EIRC NEWS are those of the authors and do not necessarily
reflect those of the EIRC of ICAI. EIRC of ICAI bears no responsibility for the contents in the articles published.
CHAIRMAN’S COMMUNIQUE 4
MEMBER’S SECTION
6
14
Behavioural Finance: Identifying Biases and 16Anomalies
STUDENT’S SECTION
Quiz Master Page 19
ChapterActivities 20
EIRCActivities 20
CMAAjay Deep Wadhwa
SECRETARY’S COMMUNIQUE 5
NEWS
Biswajit Paul
Soumendu Roy
Pinky Mistri
Hospitality Industry and its Risk Factors
FDI in the Education Sector of West Bengal:Challenges and Prospects
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CHAIRMAN’S COMMUNIQUE
EIRC NEWS 4
Vol. 9 No. 09 October, 2016
Respected Members & Beloved Students
During the month of September we have organised a 15 days Pre-Placement Orientation Programme for Final Qualified
students which was held on and from 5th September 2016 to 16th September 2016 at J. N. BoseAuditorium with 147 students.
The Inaugural Session was graced by CMABiswarup Basu, CCM, CMADebajit Sen, DF, Marathon Electrical Motors and Mr.
Ashish Palod, Sr. VP, Lafarge India Ltd. High profile resource person addressed the candidates. Different topics were
discussed by the eminent speakers throughout the Programme. Topics like CMA Curriculum linked with industry, Need of
Industry, Companies Act 2013, Basics of Financial Accounting, typical problems in practical field, Career progress through
Project Management etc was elaborated by our eminent speakers like CS Ravi Varma, CMA, CA& CS Sumit Binani, CMA
Pratap Chakraborty, Former CEO in a TATACo, CMAB. N. Chatterjee, GM, Marine Container Services (I) Ltd, CMADr. D. P.
Nandy, Director, R & J, ICAI, CMAA. S. Bagchi, Director (Finance), ICAI, CMA Chiranjit Das, Jt. Director, Taxation, ICAI,
CMA Dr. Sumita Chakraborty, Jt. Director, ICAI, CMA Harijiban Banerjee, Past President ICAI, CMA Amal Kr. Das, Past
President , ICAI, CMA Dr. Subrata Mukherjee, CMA Ranajit Ghosh, PCA, CMA Dr. N Radhakrishnan, PCA etc. Top official
of HR department of different companies like, Mr.Subrata Deb from Balmer Lawrie, Ms. Amita Saha from MSTC, Mr.
Dhrubajyoti Majumdar for L & T, Mr. Riten Chatterjee from Marathon, Ms. Jayati Sinha, Dy. Director, HR, ICAI, Mr. Gaurav
Barik, HR Consultant, Mr. Dwijadas Bandyopadhyay, MD, Herald Food Product etc. CMA Sanjay Gupta, Vice-President of
ICAI and Dr. I. Ashok, CCM also addressed to encourage the candidates.Valedictory session was graced by a Galaxy of
Dignitaries like CMA Manas Kumar Thakur, President, ICAI, CMA Avijit Goswami, CCM, ICAI, CMA Pranab Kr.
Chakraborty, Vice-Chairman, EIRC of ICAI, CMA Ashis Banerjee, Secretary, EIRC of ICAI, CMA P. Chandrokar,
Chairperson, Nasik-Ojhar Chapter and CMA Kaushik Banerjee, Secretary, ICAI were present in the valedictory session. We
believed that the students have definitely gained much confidence to get succeed in the Campus Placement.
On 20th September 2016 we have organised a Seminar on “Role of Educationalist in Nation Building – Journey so far & Road
ahead” at EIRC auditorium. Professors & lecturers from different colleges & universities graced the occasion. Maj. Gen.
S.C.Jain, Director, Army Institute of Management, Prof. Ashish Sana, Calcutta University, Prof. Arinda, Gupta, Vidyasagar
University were the speakers on the occasion.
During the month we have organised many Career Awareness Programme at different schools & colleges to bring awareness
about CMAprofession.
With warm regards.
CMA Bibekananda MukhopadhyayChairman, EIRC of ICAI
SECRETARY’S COMMUNIQUE
EIRC NEWS 5
To
All the Stakeholders,
Namaskar,
This month will be observed as “ . I
convey my sincere gratitude to Government of India for choosing such awareness programe. It will start from 2 Oct 2016. It is abest tribute to “Father of Nation”, Mohandas Karamchand Gandhi. We need to follow the ideology of Mahatma Gandhi in our dailylife. Calendar of this month contain many red colour date. So we should enjoy every moment of the forthcoming festivals.
Date of submission ofAudit Report under IncomeAct has been extended upto 17 October 2016. Professionals those are engaged inthis particular field will get more time to accomplish their work.
I believe Income Disclosure Scheme 2016 fulfill the dream of every Indians. Declarant under IDS 2016 should definitely get reliefto great extent. I convey my sincere thanks to Finance Minister for giving such an opportunity to the general public.
Students are the backbone of our Institute so student facilities are to be given priority and I request all the members to send ussuggestions/advice for strengthening the student facilities.
With warm regards
Jagrukta Week” - Awarenessnd
th
and capacity Building regarding Swachh Bharat Mission
Vol. 9 No. 09 October, 2016
CMA Ashis Banerjee
Secretary, EIRC of ICAI
EIRC NEWS 6
Abstract
Key Words:
Maximizing the value of the firm justifies the existence of abusiness entity. So it is the goal of a firm. It considers thecomplexities of the operating environment. The goal of apublicly traded firm is to maximize the shareholders' wealthas represented by the firm's stock price. Just like businesses inany other industries, hospitality firms should also take valuemaximization as their ultimate goal. A hospitality firm's valueis affected by a potential investor's investment decision that isdetermined by the investor's required rate of return (RRR) andhis or her perceived risk associated with the investment in thehospitality firm. The article will discuss the relationshipbetween the RRR and risk and show how the risk may affecthospitality firm value through its impact on the RRR. Also,determinants of hospitality firms' systematic risk, the relevantrisk that affects the RRR and firm value, will be examined.And, ways to lower the systematic risk and enhancehospitality firm value will be proposed. The three empiricalcase studies presented in this article found that the betadeterminants for all companies were not all the same. Theinconsistency is mainly due to two reasons. First, the firmsunder investigation belong to three different sectors in thehospitality industry and are facing quite different operatingand financing environment. As beta determinants are likely todiffer across industries (Melicher, 1974: 231), they may alsodiffer across sectors within the same industry. Second, thedata periods covered by the three studies were different. Thisalso may have caused differences in their beat determinantsdue to different stages in the economic cycle.
With regard to how hospitality firms should lower thesystematic risk and enhance firm value, our recommendationbased on the case studies would lean toward raising theefficiency of existing assets. But, more research on hospitalitybeat determinants needs to be conducted before we can reachfinal conclusions regarding lowering risk and strengtheningfirm value in the hospitality industry. A more comprehensiveand thorough study is needed for an in-depth understanding ofbeta determinants and ways to enhance firm value in thehospitality industry.
Hospitality Industry; Required Rate of Return
(RRR); Determinants; Systematic Risk.
The Indian tourism and hospitality industry has emerged asone of the key drivers of growth among the services sector inIndia. Tourism in India has significant potential consideringthe rich cultural and historical heritage, variety in ecology,terrains and places of natural beauty spread across thecountry. Tourism is also a potentially large employmentgenerator besides being a significant source of foreignexchange for the country.
The industry is expected to generate 13.45 million jobs!across sub-segments such as Restaurants (10.49 millionjobs), Hotels (2.3 million jobs) and Travel Agents/TourOperators (0.66 million). The Ministry of Tourism plans tohelp the industry meet the increasing demand of skilled andtrained manpower by providing hospitality education tostudents as well as certifying and upgrading skills of existingservice providers.
Maximizing the value of the firm justifies the existence of abusiness entity. So it is the goal of a firm. It considers thecomplexities of the operating environment. Costmanagement is the process by which companies control andplan the costs of doing business. For a publicly traded firm,the firm value is reflected in its stock price. Therefore, thegoal of a publicly traded firm is to maximize the shareholders'wealth as represented by the firm's stock price. Just likebusiness in any other industries, hospitality firms should alsotake value maximization as their ultimate goal. A hospitalityfirm's value is affected by a potential investor's investmentdecision that is determined by the investor's required rate ofreturn (RRR) and his or her perceived risk associated with theinvestment in the hospitality firm. This article will discuss therelationship between the RRR and the risk and show how therisk may affect hospitality firm value through its impact onthe RRR. Also, determinants of hospitality firms' systematicrisk, the relevant risk that affects the RRR and the firm value,will be examined. And, ways to lower the systematic risk andenhance hospitality firm value will be proposed. And foreignarrivals are rising as per last update on October, 2016 -
Over 7.1 million foreign tourist arrived in 2015
Introduction
l
MEMBER’S SECTION
Hospitality Industry And Its Risk FactorsBiswajit Paul
Assistant Professor, Department of Commerce, University of Gour Banga, Malda, West Bengal
Vol. 9 No. 09 October, 2016
EIRC NEWS 7
(January to November).
Foreign tourist arrivals increased at a CAGR of 7.1 percent during 2005-25.
By 2025, foreign tourist arrivals in India is expected toreach 15.3 million, according to the World TourismOrganization.
To know about Hospitality Industry in India and its riskdeterminants.
To discuss the relationship between the RRR and therisk.And
To show how the risk may affect hospitality firm valuethrough its impact on the RRR.
The stock price of a hospitality firm is affected by prospectiveinvestors' interest in the firm. When investors like a firm, thefirm's stock price will go up and the existing shareholders willbenefit. When investors dislike the firm, the stock price willgo down and existing shareholders' wealth will decline. Forexisting shareholders of a hospitality firm, their wealth in thefirm depends on the decisions of potential investors.According to the finance theory (Keown et al., 2002:5), aninvestor makes an investment decision based on his or herRRR and the risk associated with the investment. A rationalinvestor is risk-averse. He or she will always requireadditional investment risk. Therefore, higher risk isassociated with higher RRR and vice versa. The risk-returntrade-off should affect hospitality investors' decision-makingand hence the value of a hospitality firm. When the firm risk asperceived by the capital market rises, investors will raise theirRRR to compensate for bearing additional risk.
Determining a higher RRR, hospitality investors will not buythe stock unless the stock price drops to a very low level so asto achieve a higher expected return or to realizetheir higherRRR. On the other hand, when the perceived risk of investingin a hospitality firm declines, investors will lower their riskpremium and hence the RRR from investing in the firm.Determining a lower RRR from investing in the firm,
l
l
l
l
l
Objectives
Risk-Return Trade-OffAnd Firm Value
investors will be willing to purchase the stock even when thestock price is high because they do not expect to achieve ahigh return from a safe investment. In the final analysis, therisk associated with the investment in a hospitality firmaffects the investor's RRR and eventually affects the stockprice or the value of the firm.
An important implication of modern finance theory is that thehigher the non-diversifiable risk of a portfolio, the higher itsexpected return. For more than 20 years, financial academicsand practitioners have used beta the central variable in thecapital asset pricing model, or CAPM as their primarymeasure of non-diversifiable risk. The CAPM theory(Sharpe, 1963:277, 1964:425; Lintner, 1965:587) holds thatthe expected return or the RRR on the risky asset, such as astock, has two components: the risk-free rate of return, whichis to compensate for delaying consumption, and the riskpremium to compensate for bearing the risk.According to theCAPM, the risk premium must be measured in a portfoliosense and is the excess market return over the risk-free ratemultiplied by the level of the market-related risk orsystematic risk for the specific asset or stock.Mathematically, the CAPM can be described in the followingequation;
Ri = Rf + (Rm - Rf) x B (1)
Where;
'Ri' is the expected rate of return or RRR on the ith security
'Rf' is the risk-free rate of return
'Rm' is the return on the market portfolio including all stocksin the market and
'B' is the systematic risk of the ith stock
According to the CAPM theory, there are two types of risks ofa firm or its stock. The first is the market-related systematicrisk, commonly denoted as beta. It is a stock's volatilityresulting from the market's volatility or simply the covarianceof a stock's return with that of the entire market. The second isthe unsystematic risk, i.e. the stocks volatility caused by firm-specific events, such as lawsuits, strikes, unexpected good orbad earnings announcements. The total risk of a firm,measured by the variance or standard deviation of the stockreturn, is a combination of the two types of risk. Forshareholders, the volatility or unsystematic risk due to firmspecific events can be reduced or eliminated by holding a welldiversified portfolio of different stocks. If the shareholderholds a large portfolio consisting of many different stocks,stock price movements caused by firm-specific events mayoffset each other, thus neutralizing the effect of those events.This type of stock volatility or unsystematic risk can becompletely diversified away if the investor holds asufficiently large portfolio of stocks. The Capita AssetsPricing model (CAPM) specifies the relationship between
Relevant Risk For Firm Valuation
Vol. 9 No. 09 October, 2016
EIRC NEWS 8
risk and required rates of return on assets when they are held inwell diversified portfolios.According to the CAPM, investorsshould not be rewarded for bearing the unsystematic riskbecause, in the final analysis, it can be diversified away.Consequently, unsystematic risk should not be a relevantfactor in determining the investor's RRR and capital assetspricing. On the other hand, the market-related volatility orsystematic risk of a stock is its covariance with the market.This type of volatility or risk cannot be diversified awaybecause the volatility is caused by events that affect all stocksacross the capital market. Even if a shareholder owns aportfolio including all stocks in the market, such as an indexfund, he or she will still face the market risk caused by marketevents, such as presidential elections, rising oil prices andmajor terrorist attacks. The systematic risk cannot bediversified away and investors have to deal with it. Therefore,investors must be rewarded for bearing it and thus thesystematic risk is the relevant risk that affects the investor'sRRR. In other words, the systematic risk of a firm must beconsidered when determining the price of a stock on thecapital market. High systematic risk needs to be compensatedby high return. In contrast, because the unsystematic risk canbe completely diversified away, investors need not to becompensated for bearing it.
Sharpe (1963:277) developed a single-index model thatrelates the rate of a stock to a common market index in a linearequation. The model, often referred to as characteristic line, iscommonly used for estimating the systematic risk. Based onthe model, the sensitivity of a security's return to the return onthe Sharpe (1963:277) developed a single-index model thatrelates the rate of return of a stock to a common market indexin a linear equation. The model, often referred to ascharacteristic line, is commonly used for estimating thesystematic risk. Based on the model, the sensitivity of asecurity's return to the return on the capital market (marketportfolio), or beta, can be estimated by the characteristic linewith historical data as in the following equation;
Ri = ai + BiRm - ei (2)
Where,
'Ri' is the rate of return on the ith security
'ai' is the estimated vertical intercept
'BiRm' is the estimated beta or systematic risk of the ith stock
'Rm' is the rate of return on the market portfolio
'ei' is the error around the regression line that represents therelationship of the two
A firm's operating, investing, financing and dividend policiesaffect its business and financial risk and eventually itssystematic risk. Business risk is the volatility of a firm'searnings before interests and taxes (EBIT). Financial risk isthe additional variability in return on equity or earnings per
VariablesAffecting The Systematic Risk
share (EPS) due to the use of debt leverage. The managementof a firm can control financial and business risk variables thatwill eventually affect the company's systematic risk. Breenand Lerner (1973:339) suggest that changes in a firm'sfinancing, investing and operating decisions can alter itsstock return and risk features. In particular, the systematicrisk or beta of the firm is likely to change. As the systematicrisk affects investors' RRR in a framework as described by theCAPM model (see Equitation: 1), an increase in thesystematic risk will raise the investor's RRR and decrease thefirm value and vice versa. Therefore, beta, the systematic riskof a firm's common stock, links corporate decisions andbehaviours with the market value of the firm's stock. Theimportance of beta to firm value has prompted many financialresearchers to explore the relationship between beta andfinancial variables in an attempt to identify betadeterminants. To investigate beta determinants, researchstudies have focused on the relationship between beta andliquidity, debt leverage, efficiency, profitability, dividendpayout, firm size and growth variables. Most empiricalstudies have used the multiple regression method with beta asthe dependent variable and firm-wise financial variables asindependent variables.
Competing theories exist regarding how a firm's liquiditymay affect its systematic risk. Jensen (1984:323) proposes apositive relationship between a firm's liquidity and itssystematic risk, arguing that overly high liquidity mayincrease a firm's agency cost of free cash flow, thus raising itssystematic risk. Nevertheless, Logue and Merville (1972:37)and Mover and Chatfield (1983:123) assume a negativerelationship between the two and hold that high liquidity is anindicator of low level of short-term liabilities and lowsystematic risk. An investigation of the correlation betweencurrent ratio and beta by Beaver et al. (1970:654) foundcurrent ratio negatively correlated with beta. However, theempirical studies by Borde (1998:64), Rosenberg andMcKibeen (1973:317), and Westerfield (1972:1649) foundliquidity ratios positively associated with the systematic risk.On the other hand, the study by Logue and Merville (1972:37)failed to find a significant relationship between liquidityratios and beta.
Financial theory suggests that higher debt leverage exposesshareholders to greater financial risk and hence highersystematic risk (Bowman, 1979:617; Moyer and Chatfield,1983:123; Chu, 1986:48; Amit and Livnat, 1988:19).Previous research studies in this field have employed vvariety of ratios to measure financial leverage and the mostcommonly used ratio is total liabilities to total assets or debtratio. Empirical findings unanimously report a positiverelationship between leverage and beta (Beaver et al.,
Liquidity
Debt Leverage
Vol. 9 No. 09 October, 2016
EIRC NEWS 9
1970:654; Hamada, 1972:435; Logue and Merville, 1972:37;Rosenberg and Mckibeen, 1973:317; Mandelker and Rhee,1984:45; Amit and Livnat, 1988:19; Borde et al., 1994:177)Melicher's (1974:231) results showed that the beta and debtleverage relationship might be positive but non-linear. In thisstudy, when leverage increased, beta increased at anincreasing rather than at a constant rate.
Logue and Merville (1972:37) assert that operating efficiency,orthe efficiency in using assets to generate revenues, shouldhave a negative influence on the systematic risk. Firms withhigher operating efficiency may produce greater profits andare thus associated with lower profitability of failure andsmaller systematic risk. The empirical results of Logue andMerville (1972:37) confirmed their assertion by showingbeta's negative correlation with assets turnover ratio, a ratiomeasuring the efficiency in using total assets to generaterevenues, in a linear pattern.
A firm's profitability can be assessed relative to sales, assets,equity or share value. According to Logue and Merville(1972:37), high profitability lowers the probability ofbusiness failure, thus helping lower a firm's systematic risk.Scherrer and Mathison (1996:5) also argue for a negativerelationship between profitability and systematic risk. Theypropose that the stability of the cash flow from operation,which reduces the systematic risk, is determined by the abilityto manage the property profitably. Using profit margin andreturn on assets as profitability ratios, Logue and Merville(1972:37) empirically proved that beta was negativelycorrelated with both ratios. The profitability ratios areimportant because it indicate weather the firm is doing what itset out to do: make a profit and provide a return to its investors.Melicher's (1974:231) regression analysis, however, foundbeta positively related to return on equity. It is possible thatsome firms generating high profits over time may implementaggressive business strategies, subjecting themselves to ahigher level of risk.
Financial theory holds that high dividend payout ratio shouldhave a negative impact on systematic risk, either becausereturns from dividends are perceived by investors to be morecertain than returns through higher stock prices (Logue andMerville, 1972:37) or because high dividend payout implieslow agency cost (Ang et al., 1985:3).According to Jahankhaniand Lynge (1980:169), firms with great earnings variabilitytend to distribute fewer dividends than more stablecompanies. Therefore, dividend payout should be inverselyassociated with systematic risk. Numerous empirical studiesconfirmed the negative relationship between dividend payoutand beta (Beaver et al., 1970:654; Pettit and Westerfield,1972:1649; Breen and Lerner, 1973:339; Rosenberg and
Operating Efficiency
Profitability
Dividend Payout
McKibeen, 1973:317; Melicher, 1974:231; Fabozzi andFrancis, 1979:61;Ang et al., 1985; Bordr, 1998:64).
Afinal effect on beta, though less important than the others, isfirm size. Theoretically, large firms tend to have lowsystematic risk because of their better ability minimize theimpact of economic, social and political changes (Sullivan,1978:209) or their market power that enables them to achievesuperior profits unattainable in a more competitiveenvironment (Moyer and Chatfield, 1983:123; Ang et al.,1985:3). The negative impact of size on systematic risk hasbeen confirmed in a number of empirical studies, includingthose byAnget al., (1985:3), Patel and Olsen (1984:481), Levand Kunitkzy (1974:259), Breen and Lerner (1973;339) andLogue and Merville (1972:37).
Our work over the past decades has shown corporate growthto be a highly significant and consistent predictor of beta. Themore pronounced the growth orientation, the higher the betais likely to be.Agrowth oriented strategy implies large capitalinvestment plans. Such investment, especially if long term,means greater investor uncertainty about the eventual outcomes of thisin to higher risk capital spending. And this isgenerally translates in to higher risk. Logue and Merville(1972:37) contend that fast-growth firms may face greatcompetition and are more sensitive to economic fluctuations.Idol (1975:55) points out that firms experiencing high growthare perceived by investors an processing substantial risk. Hishypothesis was first supported by Logue and Merville(1972:37) who found a positive association between annualgrowths in total assetsand beta. Borde (1998:37) showed thatgrowth in EBIT was positively related to beta, providingfurther support to the hypothesized relationship betweengrowth and the systematic risk.
The present study is descriptive in nature. The data used forthe study is secondary in nature and has been collected fromBooks, Magazines, Newspapers, ResearchArticles, ResearchJournals, E-Journals, and websites.
There are significant and persistent differences in beatsbetween industries. Logue and Merville (1972:37) examinedthe relationship between beta and financial variables usingdata from four different industries (autos and auto parts,building and building supplies, electronic and electricalsupplies and machinery). They found that debt leverage wasthe only variable demonstrating a positive impact on betaacross the four industries. Moreover, the signs andsignificance levels of other financial variables differedamong the industries. Melicher (1974:231) provided furtherevidence for the claim that the relationship between financialvariables and beta varies across industries. In summary,
Firm Size
Growth
Methodology
Beta-Affecting Variables DifferAcross Industries
Vol. 9 No. 09 October, 2016
EIRC NEWS 10
previous empirical studies on the relationship between betaand financial variables indicate that debt leverage and growthtend to increase the systematic risk, whereas operatingefficiency, dividend pay out and firm size are likely to have anegative impact on the risk. On the other hand, the findings ofthe impact of liquidity and profitability on beta areinconclusive. As the relationship between financial variablesand beta may differ widely across industries, findings basedon non-hospitality firm data may not be applicable to thehospitality industry. To enhance the value of hospitality firms,hospitality researches need to find the particular financialvariables that exert an impact on hospitality systematic risk,thus finding ways to reduce the systematic risk for hospitalityfirms. Presented below are three empirical studiesinvestigating beta determinants for different sectors in thehospitality industry. They may shed light on how hospitalityfirms can reduce their systematic risk and strengthen firmvalue.
In an attempt identify variables that determine casino firms'systematic risk, Gu and Kim (1998:357) conducted anempirical investigation using a sample of 35 US casino firmsfor the period of 1992-1994 when the US casino industryexperienced the fastest growth. Using weekly firm stockreturn and the New York Stock Exchange (NYSE) indexweekly change as the market return, the study first estimatedthe beta or systematic risk of each casino firm based on thecharacteristic line model (see Equation: 2). The slope of thecharacteristic line of each firm, estimated by regressing thefirm's weekly stock-return against the NYSE weekly return,represented the sensitivity of the stock's return to the marketreturn and was the estimated beta.
Four financial ratios were tested as potential determinants ofcasino beta. They were current ratio, which was current assetsdivided by current liabilities; leverage ratio, a ratio of totalliabilities to total assets; assets turnover ratio, which was totalrevenue divided by total assets; and profit margin, a ratio ofnet income to total revenue. The four ratios represent liquidity,leverage, efficiency and profitability, respectively. With theestimated beta as the dependent variable and the three-yearaverages of the financial ratios as the independent variables ina cross-firm multiple regression analysis, the relationshipbetween those financial variables and beta were examined.
The results of the multiple regressions are presented in Table19.1. only one variable, total assets turnover, was foundnegatively correlated with beta at a statistically significantlevel, suggesting that a casino firm efficiently using itsexisting assets to generate revenue tends to have a low beta.Current ratio and profit margin were negatively associatedwith beta, suggesting that higher liquidity and profitabilitylead to lower beta. Both of them, however, were statisticallyinsignificant. The impact of debt leverage on beta was alsofound statistically insignificant.
Case One: Beta Determinants In The Casino Industry
Table: 19.1 : Casino firm beta determinants
Case Two: Beta Determinants Of Hotel Reits
That a casino firm efficiently using its existing assets togenerate revenue tends to have a low beta. Current ratio andprofit margin were negatively associated with beta,suggesting that higher liquidity and profitability lead to lowerbeta. Both of them, however, were statistically insignificant.The impact of debt leverage on beta was also foundstatistically insignificant.
The significant negative correlation between assets turnoverratio and beta implies that efficient assets management canlead to lower systematic risk for casino firms. In the mid-1990s, the US casino market was becoming saturated as aresult of gaming proliferation and the industry wasexperiencing sluggish revenue growth (Gu, 1997:30). Gu andKim's (1998:357) findings suggest that making existinggaming capacity more productive, rather than furtherexpanding the capacity, during a market saturation may helpreduce a casino firm's systematic risk and enhance the firmvalue. Continuous expansion of gaming capacity in asaturated market would further increase the total assets ofcasinos and deteriorate the assets turnover ratio. Lower assetsefficiency would eventually increase casino firms' systematicrisk and negatively affect their value.
As a unique property sector in the hotel industry, hotel realestate investment trust (REIT) companies have grown at aremarkable pace since their introduction to the public in1993. By the end of 1999, the number of publicly traded UShotel REITs increased to 19 firms and their total marketcapitalization reached $ 8.8 billion (Grupe and DiRocco,1999:21). Based on the data of 19 publicly traded hotelREIT's companies during 1993-1999, Kim et al. (2002:138)examined the relationship between hotel REITs' beta andfinancial variables. In this study, monthly, rather than weekly,stock return and market return were used to estimate the betasof the hotel REIT firms based on the characteristic line (seeEquation: 2). Monthly stock return was regressed against themonthly NYSE return to obtain the beta coefficient for eachhotel REIT firm. Seven variables commonly used inempirical studies on beta determinants were tested aspotential determinants of beta. They were quick ratio, debtratio, return on equity, assets turnover, dividend payout,capitalization and assets growth. Quick ratio, representing
Vol. 9 No. 09 October, 2016
Independent variable coefficient t-statistic
InterceptCurrent ratioLeverage ratioAssets turnoverProfit margin
2.378-0.029-0.344-0.493-0.043
7.385**-0.630-0.802
-1.838*-0.166
Note: **and * indicate significance at the 0.05 and 0.1 levels,respectively.
EIRC NEWS 11
liquidity, was defined as cash, marketable securities andaccounts receivables dividend by current liabilities. Debtratio, a measure of leverage, was a ratio of total liabilities tototal assets.
Assets turnover ratio was total revenue divided by total assets,indicating the efficiency of using assets to generate revenue.
Return on equity, a ratio of net income to total equity, was ameasure of profitability relevant to the owner's investment.Dividend payout was the average annual dividend paid toshareholders. Capitalization, which was the number ofoutstanding shares multiplied by the closing stock price at theend of the year, was as a measure of firm size. Finally, assetsgrowth was the annual percentage change in total assets, ameasure of firm growth. With the estimated beta as thedependent variable and the seven-year averages of the sevenfinancial variables as the independent variables in cross-firmmultiple regression, the relationship between selectedfinancial variables and beta was examined.
The findings are presented in table 19.2.
The three statistically significant variables in the regressionmodel deserve more attention. Consistent with betadeterminants theory, debt ratio was positively corrected withbeta. Evidently, higher leverage contributes to highersystematic risk for hotel REITs. Capitalization, as expected,had a negative and significant relationship with beta,suggesting that large hotel REITs are less risky in terms oftheir covariance with the market. The most influencingvariable in the regression model was asset growth, asindicated by its coefficient size and significance level. The
Table: 19.2 : Determinants of systematic risk of hotelREITs
positive coefficient shows that high growth tends to increasethe systematic risk of a hotel REIT firm.
The positive and significant correlation between debt ratioand beta found in this study suggests that using less debt canhelp reduce the systematic risk of a hotel REIT. Debtfinancing creates financial risk, thus augmenting thesystematic risk of a firm.
Furthermore, according to Howe and Shilling (1988:983), thetax gain from corporate borrowing is negative for firmswhose effective marginal tax rate is zero. Consequently, non-tax-paying firms, such as hotel REITs, are forced to pay highinterest on their external loans. This relative disadvantage ofusing debt for tax exempt firms may further magnifysystematic risk of hotel REITs. When formulating theirfinancing policy, hotel REITs must be cautious about thefinancial risk associated with leverage. Hotel REITs shouldcarefully weigh the advantages of high leverage against itsrisk.
The significant and positive regression coefficient for assetgrowth in the model suggests that hotel REITs pursuingconservative growth may carry lower systematic risk. Fast-growing hotel REITs need large amounts of external capitalto support their expansion and growth. While raisingadditional debt will certainly augment the firm's financialrisk, issuing new stocks carries the risk of diluting futureearnings and increases uncertainty. Moreover, as hotels wereincreasingly faced with less favourable operating conditionsin the late 1990s, aggressive expansion may be even riskier.According to Rushmore (1998:10), most hotel industryanalysts believed that the US lodging market was headinginto another cycle of over building in the late 1990s.Bloomberg (1998) reported that after eight years of growthsince 1991, profits were slowing down for US hotels andexpansion was likely to take a toll on room prices andoccupancy levels. With an imbalance between room supplyand demand, occupancy would fall, room rates would turnflat and profits would decline. In such a market environment,growth via new expansion might not be a wise pursuance,because such a strategy can greatly increase the systematicrisk. A conservative growth was thus a more appropriateapproach for hotel REITs during the late 1990s.
The negative relationship between capitalization and betasuggests that large hotel REITs have lower systematic risk.While synergy may enable large hotel REITs to benefit fromlow operating and capital costs, large hotel REITs are betterpositioned for geographical diversification to achieverevenue stability. These advantages combined, as indicatedby Scherrer and Mathison (1996:5), may help improve thestability of operating income, which is the dividend base, andlower systematic risk for large hotel REITs. However,increasing firm size by developing more hotel properties maybe unwise in a saturated hotel market. To achieve synergy and
Vol. 9 No. 09 October, 2016
Independent variable Coefficient t-statistic
InterceptQRTD/TAROEATDIVCAPGrTA
0.18190.03590.01150.00980.46460.0008-0.00040.1263
0.691.422.38*1.720.550.58
-2.87*3.66**
Note:*,** indicate significance at the 0.05 and 0.01 levels,respectively; QR = the average quick ratio over the studyperiod; TD/TA = the average total debt to total assets over thestudy period; ROE = the average return on equity over thestudy period; AT = t he average assets turn over ratio over thestudy period; DIV = the average total dividend payout overthe study period; CAP = the average total capitalization overthe study period; GrTA = the average annual growth rate intotal assets over the study period.
EIRC NEWS 12
geographical diversification, hotel REITs may considerconsolidation within the industry's existing capacity throughmergers and acquisitions.
Based on the above empirical results, two basic conclusionswith policy implications can be drawn for hotel REITs. First,when the lodging industry is heading for a slow down in itsbusiness cycle, growth should be pursued via consolidation,or mergers and acquisitions, rather than via new capacityexpansion.
Consolidation may bring about synergy and geographicaldiversification, thus lowering systematic risk andstrengthening the firm value. Aggressive expansion with newproperty development is risky in a relatively saturated market.Second, to reduce the financial risk associated with debt andhence to lower systematic risk, debt-burdened hotel REITsneed to adjust their financing more toward equity. Inparticular, if new financing is needed for supporting growth,internal financing should be preferred to external financing.
To investigate the beta determinants in the restaurant industry,Gu and Kim (2002:1) used a sample of 75 publicly tradedrestaurant firms for the period of 1996-1999. Monthly stockreturn was regressed against monthly market return,represented by NYSE index percentage change, to estimatethe beta of each restaurant firm in the same manner asdiscussed in previous sections. This study also employedseven variables as candidates of beta determinants. Like thestudy by Kim et al. (2002:138), this study used quick ratio,dividend payout the total assets as liquidity, dividend and sizevariables. Unlike the study by kim et al. (2002:138), this studyused equity ratio, which is total equity to total assets, return onassets, total assets growth rate and total assets as proxies fordebt leverage, profitability, growth and firm size. Each of theseven variables was quantified by its four year average valueof the data period.
With estimated restaurant beta as the dependent variable andthe seven financial variables as the independent variables in across-firm multiple regression analysis, the relationshipbetween the seven variables and beta was investigated.Different from previous beta determinants studies thattypically used ordinary least square (OLS) regression, Gu andKim (2002:1) made two methodological changes. First, theweighted least-squares (WLS) regression procedure, assuggested by Kleinbaum et al. (1988:219) was used to avoidthe heteroscedasticity problem commonly encountered inregression using cross-firm data. The weights were thereciprocals of the absolute values of the residuals from aninitial ordinary least squares regression. Second, a forwardselection procedure was employed in establishing the finalWLS regression model. In a forward selection procedure, thefirst variable to enter the model is the one that has the largestcorrelation with the dependent variable.
Case Three: Restaurant Firms' Beta Determinants
If the variable is statically significant, then the secondvariable with the largest semi-partial correlation with thedependent is considered. If the second variable is significant,then a third variable with the next largest semi-partialcorrelation is considered etc… at some stage a given variablewill not make a significant contribution to the prediction ofthe dependent variable and the procedure is terminated(Kleinbaum et al., 1988:326). The final WLS model has onlyassets turnover and quick ratio as remaining variables (Table19.3). The other five candidates were excluded by theforward selection procedure because of their insignificantpartial correlation with beta. Like the study of Gu and Kim(1998:357), this study found assets turnover significantly andnegatively associated with the firm's systematic risk.
High efficiency in using assets to generate revenue helpslower the restaurant risk. Unlike the Gu and Kim (1998:357)study, which found the systematic risk not significantlyaffected by firm liquidity, this study shows that liquidity tendsto increase restaurant systematic risk. The inconsistency inthe findings of the two studies is understandable. Betadeterminants may vary not only across industries, but alsoacross different sectors within the same industry. The positiveassociation between liquidity and beta identified in this studyindicates that investors dislike excess liquidity of restaurantfirms. Too much liquidity implies that available sources arenot being invested in operating assets that may create higherreturn than cash or near-cash assets (Borde, 1998:64), thusincreasing the risk of losing high-return opportunities.Therefore, to lower the beta and increase the firm value forshareholders, restaurant firms should avoid holding too muchcash and near-cash assets not needed for covering their short-term liabilities. If high-return opportunities are available,excess cash and near-cash assets should be invested.Otherwise, they should be distributed to shareholders asdividends.
The results also revealed the dominant impact of assetsturnover on restaurant beta. The highly significant andnegative relationship between assets turnover and beta foundin this study strongly suggests that using existing restaurantassets to generate more sales revenue is critical to loweringsystematic risk of a restaurant firm. According to Schwartz(1999:203), many restaurant chains simply expended tooquickly and consequently went bankrupt. The restaurantindustry is typically of low profit margin. In markets that areapproaching saturation and where the competition is
Table 19.3 : Restaurant beta determinants
Vol. 9 No. 09 October, 2016
Independent variable Coefficient t-statistic
InterceptQuick ratioAssets turnover
0.8820.125-0.242
9.973*2.046**-5.186*
Note: *Significant at the 0.01 level; ** Significant at the 0.05 level
EIRC NEWS 13
intensifying, restaurants' operating costs will increasedramatically, especially for new properties. Expansion byestablishing more restaurant properties may subject firms tolower profit margins and higher default risk. Therefore,relying on existing properties to generate more sales revenuemay reduce the risk as perceived by potential restaurantinvestors, thus lowering the beta and enhancing the firm valuefor existing shareholders.
Due to time constraint this research study has been made onthe basis of previous data. This study may be up-dated andredesigned by considering the latest available data.
The CAPM is a powerful tool for corporate capital budgetingand performance measurement. Its full potential, however,has not yet been realized, largely for the following reasons. Tobe applied effectively the user must have credible estimates ofthe risk free interest rate, the market risk premium, and theindividual asset's beta. The first factor, interest rates, can beobserved regularly and therefore do not present a problem.The market risk premium can be estimated from historicaldata, or projected using a sophisticated statistical technique.Beta estimation, however, has been a major stumbling blockin applying the CAPM.
The three empirical case studies presented in this article foundthat the beta determinants for the casino firms, hotel REITsand restaurant companies were not all the same. The
Limitation
Conclusion
inconsistency is mainly due to two reasons. First, the firmsunder investigation belong to three different sectors in thehospitality industry and are facing quite different operatingand financing environments.
As beta determinants are likely to differ across industries(Melicher, 1974:231), they may also differ across sectorswithin the same industry. Second, the data periods covered bythe three studies were different. This also may have causeddifferences in their beta determinants due to different stagesin the economic cycle. However, among the threeinvestigated hospitality sectors, two sectors, namely thecasino and restaurant sectors, had assets turnover negativelyand significantly correlated with beta, suggesting that firmsthat use existing assets to generate more revenues have lowersystematic risk. Therefore, with regard to how hospitalityfirms should lower the systematic risk and enhance firmvalue, our recommendation based on the case studies wouldlean toward raising the efficiency of existing assets.
Though, more research on hospitality beta determinantsneeds to be conducted before we can reach final conclusionsregarding lowering risk and strengthening firm value in thehospitality industry. Especially, the beta determinants of non-REIT hotels firms, which represent a significant part of thelodging industry, have never been examined. A morecomprehensive and thorough study is needed for an in-depthunderstanding of beta determinants and ways to enhance firmvalue in the hospitality industry.
Vol. 9 No. 09 October, 2016
EIRC NEWS 14
Introduction:
FDI (Foreign Direct Investment) :
Types of FDI:
Education, Research and training are suppose to be the threepillars of Human Resource Development. An appreciableincrease in life expectancy as well as the Human populationhas meant a strong pressure on the resources of Governmentsworld over; for Educating a large population and ensuringemployability is a daunting task for the public exchequer.Necessity is the mother of invention. So Academia-Industrycollaboration is dictated by necessity. Over the last decade anda half, the world has become a global village. West Bengal hasthe attention of world players for investment and expansions.Due to this arises a need for ready-for-the-job people. Butcontradictory to this, there is a large set of employees whoneed to be skilled, re-skilled and up-skilled to meet the needsof the changing environment. This is only possible through theactive role of industry in sharing the know-how and expertiseand academia in developing programmes and solutions to fillthe void.
Foreign direct investment (FDI) is direct investment by acompany located in another Country either by buying acompany in the country or by expanding operations of anexisting business in the country. Foreign direct investment hasmainly two forms. In broader sense: foreign direct investmentincludes "mergers and acquisitions, building new facilities,reinvesting profits earned from overseas operations and intracompany loans". In a narrow sense: foreign direct investmentrefers just to building new facilities Government of India videPress Note 2 (2000 series) dated 11.2.2000 of the Ministry ofCommerce and Industry (department of Industrial Policy andPromotion) has allowed FDI up to 100%, on the automaticroute in the Education Sector.
Horizontal FDI arises when a firm duplicates its homecountry-based activities at the same value chain stage ina host country through FDI.
Vertical FD I takes place when a firm through FDImoves upstream or downstream in different valuechains i.e., when firms perform value-adding activities
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stage by stage in a vertical fashion in a host country
FDIs from across the globe are gushing towards India .FDIhas been in the news for one or the other reason having seenacceptance as well as opposition from last few years.Basically this word became famous after the year 2000 whenthe Indian govt. has approved FDI. India's education sectorhas witnessed significant expansion since the governmentapproved FDI in April 2000, thus providing a hugeopportunity for investment. Yet FDI remained zero in the firstthree years, increased till 2008-09 and then kept falling again.In the past 11 years, the total FDI in education has stood at Rs2,051 crore, the yearly average of Rs 186 crore being one-tenth of one per cent of what the Centre and stategovernments annually spends in this sector. Government hasproposed 100 percent foreign direct investment in highereducation and hinted at making reservation mandatory in theinstitutions to be set up by foreign universities in the countryAround the time of its conceptualization, India was goingthrough a wave of protests on FDI and its impact on the Indianeconomy. There are individuals who are wholeheartedlysupporting the move of the Government to allow FDI invarious sectors, especially Multi-brand retail and aviation,while there are a great number of others who vehementlyoppose any such move, citing various reasons. India willrequire 1,000 more universities and 50,000 more colleges inthe coming decade to accommodate 50 million college-agestudents. The governments will find it extremely difficult tofund higher education in future due to huge investmentsrequired to establish large number of higher educationinstitutes of global standard to full fill its needs. The onlyoption left is to deregulate the Higher Education sector andencourage Foreign Direct Investment in this sector.
a. Procedural delays in getting clearances and licenses
b. Eradicating regional disparity
c. Improve infrastructural facilities (i.e roads, publictransport etc.)
FDIAnd Indian Education :
Challenges relating to FDI in Education Sector of WestBengal
MEMBER’S SECTION
FDI in the Education Sector of West Bengal: Challenges andProspects
Soumendu Roy
University of Gour Banga, Malda
Email id: [email protected]
Vol. 9 No. 09 October, 2016
EIRC NEWS 15
d. Supplying uninterrupted power to education institutions
e. Weeding out bureaucracy, red-tapism and corruption
"Not-for-Profit": entry barrier for private capital.
Regulatory framework is a major barrier. Multipleapprovals are required. Policies are also inconsistent.
UGC not open to recognizing Foreign Universities
Limitations on intake of students (quotas, foreignstudents, mode of admission etc.)
Limited choice of entity - Trust, Society or Section 25company
Lack of availability of trained faculty
Course content not in line with the expectations of theindustry leading to poor employability
Excessive and multiple regulators and regulations
High capital expenditure requirements for setting upHigher Education sector
Ensuring enhanced flow of Foreign Direct Investment (FDI)
Key Issue on FDI:
Prospects relating to FDI in Education Sector of WestBengal
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in the educational sector of West Bengal may proffer a three-pronged benefit.
First and foremost, it may bring world class and job orientededucational courses with pin-point specialization and cuttingedge technology.
Secondly, it may bring high level training for teachers/instructors and students. In valid fields, and ensure betteremployability.
Last but not least, it may bring to the sector bettermanagement practices in terms of flexibility, costeffectiveness and width and depth of penetration.
Govt. of West Bengal badly needs funds for the developmentof education sector as it is beyond the capability of itsgovernment to cater to the need of finance. In order to tacklethis situation 100% FDI has been allowed by the Govt Indiabut besides its advantages and it is having certain severedisadvantages which needs strict action on the part of thegovt. A regulatory body should be framed otherwise Bengalmight face some bad consequences in context of culture andautonomy of foreign education providers.
Conclusion:
Vol. 9 No. 09 October, 2016
EIRC NEWS 16
Abstract :
Key words:
Introduction :
Behavioural finance denotes the study ofpsychological element in financial decision making.Traditional Financial Model like the Capital Asset PricingModel (CAPM), the Efficient Market Hypothesis (EMH), theOption-pricing theory and other financial theory are provingto be deficient as they do not answer all questions of finance.One of the most important conflicts comes from the traditionalassumption of 'rationality'. Human tendency of taking sub-rational decisions consequences to market anomalies. Thispaper tries to identify investor's biases and market anomaliesand also tries to build a conceptual framework of Behaviouralfinance. The financial markets sometimes suffer fromanomalies and hence markets turn out inefficient. This papersheds light on various components of behavioural financewhich help us to develop certain remedial measures that canbe used to correct market inefficiencies.
Behavioural Finance, Rationality, BehaviouralBiases, MarketAnomalies, Market Inefficiencies.
Individuals are always expected to actrationally of make decision based on all availableinformation. In real world the decisions of Individuals areaffected by many behavioural biases. Traditional FinancialModel are going through a paradigm shift as these model likeCapital Asset Pricing Model (CAPM), the Efficient MarketHypothesis(EMH), the option-pricing theory and otherfinancial theories are proving to be deficient as they do notdepict real scenario of financial world. Behavioural financeaims to use both psychological and economic factor for soundfinancial decision. Behavioural finance is quite large researchfield as it not only considers traditional financial theories butalso incorporates psychology in the study. Biases are certaintendencies of investors to take abrupt decision. The financialmarket suffers from anomalies and market turns outinefficient. These biases and anomalies are not explained bytraditional financial model. Hence researchers and investorshave identified the role of Behavioural finance. This researchpaper tries to give theoretical insight of behavioural finance toidentify different behavioural biases and market anomalies.This paper has also proposed a Conceptual Framework ofBehavioural finance depicting its major themes and concepts.
Review of literature : Chen and LaI (2013) helped inexploring the post announcement performance from abehavioural finance perspective. Their empirical resultindicated that there is significant stock of the presentationframing with different degree of certainty prospect whereasthere is negative effect on stock of presentation framing withcertainty prospect.
Fong (2013) argued that individuals are attracted to lotterystocks and lottery stock Investors are indeed risk seekers andsentiment prone. Lottery stock puzzles can be understoodonly by incorporating unusual risk preference and thepropensity for individual investors to track on sentiment.Sentiment has a significant positive impact on the returnspread between lottery and non-lottery stock. The author hasused a model-free approach based on stochastic dominance toinfer aggregate risk preference.
Adam and Shauki (2012) studied that investors' decision-making behaviour concerning socially ResponsibleInvestment (SRI) is influenced by intention perceivedbehaviour control and moral norm. They used StructuralEquation model (SEM) to ascertain the causal relationbetween the variables and whether these relationship could beimproved by intention as a mediator. They have takenMalaysia as their survey area.
Ren-di li and Chang-shuai Li (2012) analysed the Behaviourof Chinese Security Analysts. They suggestion were to 1)Establish a perfect regulatory system for the interest conflictof the security analyst. 2) Strengthen the regulations and self-discipline of the securities consulting Industry and 3)Strengthen the integrity management of the consultants.
Sarangaranjan (2012) empirically proved that many investorsinvesting cared much more than simply weighting the riskand expected return of various Investment asset at theirdisposal. Investors took investing as nice free-time activityand also suffered from conformity bias
Subramanyam (2007) in his paper gave review and synthesison Behavioural Finance presenting normative implication forindividuals and CEOs. He discussed on topic like empiricaland theoretical analysis of pattern in cross-section of average
MEMBER’S SECTION
Behavioural Finance: Identifying Biases and Anomalies
Pinky Mistri
Assistant Professor, Department of Commerce, University of Gour Banga, Malda, West Bengal
Vol. 9 No. 09 October, 2016
EIRC NEWS 17
stock returns trading activities and research on corporatefinance.
Statman (1999) in his paper mentioned about the tools ofBehavioural finance i.e. susceptibility to frames and othercognitive errors, varying attitude toward risk, aversion toregret, imperfect self-control, preference as to both utilitarianand value-expressive charateristics.
Olsen (1998) gave a detail origin content and rationale ofBehavioural Finance. He argued that new theories of chaosand adaptive decision making in behavioural finance can helpin solving the puzzle of stock-price volatility.
This study aims to provide generaloutline of the area of behavioural finance along with certainmajor concept and to establish a relation among them.Another objective of this study is identifying the critical areasof behavioural finance in which certain suggestive correctivemeasures can be applied which can help in controllingredundancy in financial decision making.
This paper based on purelysecondary data which were collected from different Journals,Magazines, Books, Websites, reports etc. Literature ReviewMethod has been followed in this research paper to find outthe below mentioned conclusion.
The Conceptual Frameworkdepicts major concept of Behavioural Finance and it also triesto establish a relationship among them. With this conceptualframework we can make out that Behavioural Biases tend tomarket anomalies and hence it turn the market to beinefficient. If we aim to correct the market we can do so bytargeting the psychological factor which is influencing thedecision making process and applying the correctivemeasures to Behavioural biases of investors (Fig. 1). Thisconceptual framework is being portrayed graphically by thefollowing Figure 1:
This paper has identified certainpsychological factors that affect investors' decision makingprocess. Investors' tendency to take sub-rational decision istermed as Behavioural Biases.
One of the most puzzling facts about modernfinancial market is the sheer volume of trade that occur. Noisetraders first appeared in the finance literature as a possible
Objective of the study :
Research Methodology :
Conceptual Framework :
Behavioural Biases :
Noise Traders :
escape clause for the inability of standard model to explainthe occurrence of any trade at all (Grossman & Stokey 1982).Given this volume of trading in financial securities and thesometimes less than transparent relation between investorsdemand and traditional metrics of asset value a central part ofthe behavioural finance literature explores the behaviour ofthose who trade despite having no new information toimpound into the stock price. In the words of Fisher Black,these 'noise' (non-fundamental value) based traders. Shefrinand Statman (1994) in their BehaviouralAsset Pricing Model(BAPM) have mentioned Noise traders as those who commitcognitive errors and do have strict mean variance preferenceas per CapitalAsset Pricing Model(CAPM)
In such behavioural pattern investorsoverestimate their financial intelligence and underestimaterisk and uncertainties. Kahneman and Riepe (1998) arguethat overconfidence causes people to overestimate theirknowledge, undervalue risk and overestimate their ability tocontrol events. Griffin and Tversky (1992) claim that overconfidence originate in people's biased evaluation ofevidence. Evidence has two dimensions: strength and weight.'Strength' refers to the extremity of the evidence, whileweight refers to the predictive validity of the evidence.Griffin and Tversky suggest that overconfident people tend tofocus on the strength of the evidence and then adjust ifadequately for its weight. People tend to be overconfident insituations of high strength and low weight. They tend to beunder confident in reverse situation. Overconfidence affectsnot only behaviour of secondary market traders but alsoinvestors in primary market. Overconfidence leads toerroneous bids at some auction.
Optimism denotes an exaggeration ofthe asset value relative to that which is reasonable or rationalgiven later outcomes. According to Ramnath et al. (2008)overoptimism is the tendency to overvalue the possibility ofdesired outcome and undervalue the occurrence ofunfavourable events.
It is tendencies of individuals to mimic theactions (rational or irrational) of a large group.As humans aresocial being and have a social pressure of conformity peoplebecome a part of herd. Also the common belief of herdmembers that such a large group could be wrong. Themembers of herd believe that the other know something thatthey do not. This is especially prevalent in situations in whichan individual have very little experience.
According to Tversky andKahneman (1974) the representative heuristic involvesmaking judgement based on stereotypes rather than onunderlying characteristics of decision task. Soltand Statman(1989) have argued that investors tend to believe that goodstocks are stocks of good companies because the fall preys tothe representativeness heuristic.
Overconfidence Bias :
Overoptimism Bias :
Herd Behaviour :
Representativeness Bias :
Vol. 9 No. 09 October, 2016
EIRC NEWS 18
Familiarity Bias :
Limited Attention :
Framing :
Anomalies :
Small firm outperform :
The Winner's curse :
Reversals :
People are always resistant to change andhave a fear of unknown. Hence investors prefer to hold shareswith which they are familiar. Such tendencies of familiarity indomestic setting are known as 'local bias' and at internationalsetting is termed as 'home bias'.
People do not pay equal attention to allinformation available to them. Dellavigna and Pollet (2009)argued that although limited attention has initiative appealthere is scarcity of evidence on how much the equality ofdecision making by investors is deteriorated as a result ofdistraction. There is always a correlation between the abovementioned biases. Investor's decision is driven by many biasesat a same point of point.
Framing refers to the mental accounting structureof investors. It shows that the investors' decision is influencedby frames or arrangement in which the problem is presented.Frames are the part of Kahneman and Tversky's (1979)Prospect theory. Statman (1999) analysed the dividendpuzzle with consideration of frames.
Often it is seen that market anomalies areconsequence of participation of ignorant individual investors.
The first stock market anomaly isthe smaller firms (that is, smaller capitalization) tend tooutperform large companies. As anomalies go, the small-firmeffect makes sense. A company's economic growth isultimately the driving force behind its stock's performance,and smaller companies have much longer runways for growththan larger companies. Smaller firms typically are able togrow much faster than larger companies and the stock reflectthis.
One assumption found in finance andeconomics is that investors and traders are rational enough tobe aware of the true value of an asset and will bid or payaccordingly. However, anomalies such as the winner's curseor the tendency for winning bid in an auction to exceed theintrinsic value of the item purchased suggest that this is not thecase. Rational based theories assume that all participantsinvolved in a bidding process will have access to all relevantinformation and will all come to same valuation. Anydifference in the pricing would suggest the some other factornot directly tied to the asset is affecting the bidding.Accordingto Robert Thaler (1998) article on the winner's curse there aretwo primary factors that undermine the rational bidding.
Some evidence suggests that stocks at either endof the performance spectrum over period of time (generally ayear), do tend to reverse course in the following periodyesterday's top performances become tomorrow'sunderperformers, and vice-versa. De Bondt and Thaler (1985)argued that the anomaly of past losers becoming future winneris the reflection of the cognitive error of overreaction. Not
only does statistical evidence back this up, the anomalymakes fundamentals. If a stock is a top performance has madeit expensive, likewise, the reverse is true forunderperformers. It would seem like common sense, then, toexpect that the overpriced stocks then underperform(bringingtheir valuation back more in line) while the under-pricedstocks outperform. Reversals also likely work in part becausepeople expect them to work. If enough investors habituallysell last year's winner and buy last year's losers that will helpmove the stocks in exactly the expected directions, making ifsomething of a self-fulfilling anomaly.
Efficient market supporters hate the daysof the week anomaly because it not only appears to be true; itmakes no sense. Research has shown the stock tends to moreand more on Fridays than Mondays, and that there is a biastoward positive market performance on Friday. It is not ahuge discrepancy, but it is a persistent one. On a fundamentallevel, there is no particular reason that this should be true.Some psychological factors could be at work here, though.Perhaps an end-of-week optimism permeates the market astraders and investors look forward to the weekend.Alternatively perhaps the weekend gives investors a chanceto catch up on their reading stew and fet about the market anddevelop pessimism going into Monday.
Most of the time investors are noteven aware that financial decisions are influenced bypsychological factor. Investors' decisions are influenced byone or more behavioural biases. Making investors aware ofbehavioural biases will help curtail such factors which isnegatively affecting their financial decision making process.Applying corrective measures will help investors in makingsound financial decision. Like limited attention bias can becorrected by right professional knowledge and training.Noise Trading can be corrected by self-control attitude ofinvestors.
On the basis of this study, it may be suggestedas a part of concluding observations that some certaincorrective measures are there which can be applied to curbBehavioural Biases which further helps us to reduce marketinefficiencies. Hence it can be concluded that first and theforemost making investors aware of their cognitive error indecision making process is crucial. So, corrective measurescan be targeted to the behavioural biases of investors whichcan be done by some Awareness Generation Programme(AGP) in which some professional knowledge and trainingcan be imparted to investors for overall benefit of theeconomy. Hence the financial decision making process ofinvestors can be improved if investors realise and learn fromtheir behavioural biases and apply certain correctivemeasures.
Days of the week :
Corrective measures :
Conclusion :
Vol. 9 No. 09 October, 2016
STUDENT’S SECTION
EIRC NEWS 19
Test
You
r Kno
wle
dge
!!Quiz Master PageCMA Ajay Deep Wadhwa, Former Chairman, EIRC of ICAI
Answers:
Vol. 9 No. 09 October, 2016
1.KeralaGovernmentproposedonJuly8'2016levyinga“FatTax”of14.5%onjunkfood,includingpizzas,burgers,pastaanddoughnuts,soldinbrandedrestaurants.
2.SriAjayPandey3.HemaMalini4.SunilBhartiMittal5.Dollardominatedbondpaper6.SriAmitabhKant7.ChhotaBheem8.Originally,itwasagroupofeightuniversitiesofUSA–
Howard,Yel,Pennsylvania,Princeton,Columbia,Brown,DartmouthandCornwall.NowStanfordandMIThavealsojoined.
9.China,USAandIndia10.VinodRai,formerCAG
1. What is “Fat Tax”?
2. Who is CEO of UDAI?
3. Name the brand ambassador of Kent Mineral RO water.
4. Who has been elected recently the Chairman of International Chamber of Commerce?
5. Which is known as “Masala Paper”?
6. Who is the CEO of NitiAayog?
7. Which is the most popular toon character developed in India?
8. What is “Ivy League”?
9. Which three countries are the largest producers of the slat?
10. Who is the author of the book – “Not just anAccountant”?
EIRC NEWS 20
Vol. 9 No. 09 October, 2016
Chapter Activities
Bhubaneswar Chapter of CostAccountants
20.09.16 to 19.10.16.ICAI-Bhubaneswar Chapter has organized the following career counseling programmes during the period Ineach of the Career Counseling Programme large numbers of students of pursuing +2 /+3 Commerce participated actively. Some ofthem also clarified their doubts and have shown their interest to choose CMAProfession as Career.
(1) At Salepur College, Cuttack held on 20.09.16
(2) At Ramadevi Women University, Bhubaneswar held on 23.09.16
(3) At KITT International School, Bhubaneswar held on 29.09.16
(4) At SAI International School, Bhubaneswar held on 01.10.16
(5) At Boxi Jagabandu English Medium School, Bhubaneswar held on 01.10.16
(6) At DAV Public School, Pokariput, Bhubaneswar held on 06.10.16
NEWS
EIRC Activities
A 15 days Pre-Placement Orientation Programme for Final Qualified students was held on and from 5 September 2016 to 16September 2016 at J. N. Bose Auditorium with 147 students. The Inaugural Session was graced by CMA Biswarup Basu, CCM,CMA Debajit Sen, DF, Marathon Electrical Motors and Mr. Ashish Palod, Sr. VP, Lafarge India Ltd. High profile resource personaddressed the candidates. Some of them were. Different topics were discussed by the eminent speakers throughout the Programme.Topics like CMACurriculum linked with industry, Need of Industry, CompaniesAct 2013, Basics of FinancialAccounting, typicalproblems in practical field, Career progress through Project Management etc was elaborated by our eminent speakers like CS RaviVarma, CMA, CA & CS Sumit Binani, CMA Pratap Chakraborty, Former CEO in a TATA Co, CMA B. N. Chatterjee, GM,Marine Container Services (I) Ltd, CMA Dr. D. P. Nandy, Director, R & J, ICAI, CMA A. S. Bagchi, Director (Finance), ICAI,CMA Chiranjit Das, Jt. Director, Taxation, ICAI, CMA Dr. Sumita Chakraborty, Jt. Director, ICAI, CMA Harijiban Banerjee, PastPresident ICAI, CMAAmal Kr. Das, Past President , ICAI, CMA Dr. Subrata Mukherjee, CMA Ranajit Ghosh, PCA, CMA Dr. NRadhakrishnan, PCA etc. Top official of HR department of different companies like, Mr.Subrata Deb from Balmer Lawrie, Ms.Amita Saha from MSTC, Mr. Dhrubajyoti Majumdar for L & T, Mr. Riten Chatterjee from Marathon, Ms. Jayati Sinha, Dy.Director, HR, ICAI, Mr. Gaurav Barik, HR Consultant, Mr. Dwijadas Bandyopadhyay, MD, Herald Food Product etc. CMASanjayGupta, Vice-President of ICAI and Dr. I.Ashok, CCM also addressed to encourage the candidates.
Valedictory session was graced by A Galaxy of Dignitaries like CMA Manas Kumar Thakur, President, ICAI, CMA AvijitGoswami, CCM, ICAI, CMA Bibekananda Mukhopadhyay, Chairman, EIRC of ICAI, CMA Pranab Kr. Chakraborty, Vice-Chairman, EIRC of ICAI, CMAAshis Banerjee, Secretary, EIRC of ICAI, CMAP. Chandrokar, Chairperson, Nasik-Ojhar Chapterand CMAKaushik Banerjee, Secretary, ICAI were present in the valedictory session. The Fresh CMAs were very happy with theOrientation and appreciated the value addition. The programme ended with vote of thanks by the participants.
On 20 September 2016 a Seminar on “Role of Educationalist in Nation Building – Journey so far & Road ahead” was organised atEIRC auditorium. Professors & lecturers from different colleges & universities graced the occasion. Maj. Gen. S.C.Jain, Director,Army Institute of Management, Prof. Ashish Sana, Calcutta University, Prof. Arinda, Gupta, Vidyasagar University were thespeakers on the occasion.
CareerAwareness Programme was organised at Chanchal College, Malda on 21.09.2016, M. C. Kejriwal Vidyapith on 26.09.2016,Hiralal Paul College, Konnagar on 26.09.2016, Mahakali Girls High School on 27.09.2016, UshumpurAdarsha Uchcha Vidyalayaon 27.09.2016.
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Vol. 9 No. 09 October, 2016
EIRC NEWS 21
Seminar on “Role of Educationalist in Nation Building –Journey so far & Road ahead” was organized by EIRC on20 September 2016. L/R CMA BibekanandaMukhpadhyay, Chairman, EIRC, Prof. Ashish Sana,Calcutta University ,Maj. Gen. S.C.Jain, Director,Army Institute of Management, Prof. Arinda, Gupta,Vidyasagar University & CMA S.P.Padhi, RCM, EIRC
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Seminar on “Role of Educationalist in Nation Building – Journey so far & Road ahead”
organized by EIRC on 20 September 2016th
Vol. 9 No. 09 October, 2016
EIRC NEWS 22
Career Counseling Programme organized by theBhubaneswar Chapter on 23.09.16 at Ramadevi WomenUniversity , Bhubaneswar, Odisha.
15 days Pre-Placement Orientation Programme for Final Qualified studentswas held on and from 5 September 2016 to 16 September 2016 at J. N. Bose Auditorium
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Career Counseling Programme organized by theBhubaneswar Chapter at Buxi Jagabandhu EnglishMedium School, Bhubaneswar,Odisha on 01.10.16.
Vivekananda Mission Mahavidyalaya on 24.08.2016
Central Modern School on 26.08.2016
St. Joseph & Mary's School on 30.08.2016
Krishnath College on 01.09.2016
Bajeshibpur B. K. Paul Institution on 26.08.2016
Manindra Chandra Vidyapith on 01.09.2016
Salkia Hindu School on 02.09.2016
Career Awareness Programme
Printed & published by CMA Shiba Prasad Padhi on behalf of owner EIRC of ICAI, printed at Moodran Graphica,41, Gokul Boral Street, Kolkata - 700 012. Published at 84, Harish Mukherjee Road, Kolkata - 700 025.
Editor’s name : CMA Arundhati Basu
RNI No. WBENG/2008/24583
Publication Date : October 2016
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Eastern India Regional CouncilThe Institute of Cost Accountants of India (EIRC of ICAI)
[Statutory Body under an Act of Parliament]
CMA Bhawan, 84, Harish Mukherjee Road, Kolkata- 700 025
Telephones: (033) 2455-3418/5957/6666/9999, 6456 3600-03; 6450 4305
Fax: +91-33-2455-7920 e-mail: [email protected] Website : www.eircoficwai.com
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STRATEGY ----- MANAGEMENT ---- FINANCIAL REPORTS ----- REGULATORY
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