The determinants of corporate profitability: an investigation of Indian manufacturing firms

2018 ◽  
Vol 13 (1) ◽  
pp. 66-86 ◽  
Author(s):  
Swagatika Nanda ◽  
Ajaya Kumar Panda
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Panel Data Analysis ◽  
Rate Sensitivity ◽  
Manufacturing Firms ◽  
Least Square ◽  
Nominal Exchange Rate ◽  
Content Type ◽  
Crisis Period ◽  
The Exchange Rate

Purpose The purpose of this paper is to examine the firm-specific and macroeconomic determinants of profitability of Indian manufacturing firms. It assesses the main determinants of firm’s profitability in the pre-crisis and post-crisis period from 2000 to 2015. Design/methodology/approach This methodology splits the factors that influence firm profitability in two groups: firm-specific (internal) factors and macroeconomic indicators. It further aims to look at the consistency of the factors in the pre-crisis and post-crisis period. The return on assets and the net profit margin are considered as proxy for corporate profits. The panel generalized least square and panel vector auto-regression model have been employed, and it is observed that the exchange rate seems to have played a major role in the crisis period by explaining the earning quotient for Indian firms. Findings This paper concludes that the firm-specific variables and exchange rate channels are quite relevant in explaining the profitability of Indian manufacturing firms. It accepts the hypotheses that size and liquidity enhances whereas leverage discourages the profitability. Few exceptions have been observed during the crisis period. The study also concludes that in the short run, the changes in exchange rate are not increasing profitability, but in the long run, it increases profitability as the volatility of nominal exchange rate is positively impacting profitability. Moreover, the study finds that the nominal exchange rate index is more informative and explains that profitability is better than real exchange rate index in the case of Indian manufacturing firms over the study period. Research limitations/implications The managers and the policy makers should give utmost importance to the firm-specific determinants, especially after the crisis period, and consider the appropriate exchange rate to evaluate firm performance for making any change in the policy to make any business profitable. Originality/value This study has been conducted over a longer time by using advanced panel data analysis techniques on the recent data. The study period properly captures the crisis time and the research includes different selection of profitability that highlights corporate earnings pattern. Moreover, validation of the exchange rate sensitivity of profitability over nominal and real exchange rate increases the robustness of the study. Moreover, on Indian manufacturing firms, the study is very significant and unique.

The nexus between exchange rate and long-term investment in Indian manufacturing industry

2019 ◽  
Vol 42 (2) ◽  
pp. 174-198
Author(s):  
Ajaya Kumar Panda ◽  
Swagatika Nanda
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Manufacturing Industry ◽  
Manufacturing Firms ◽  
Financial Flexibility ◽  
Content Type ◽  
The Exchange Rate ◽  
Exchange Rate Changes ◽  
The Impact

PurposeThe purpose of this paper is to examine the impact of changes in the exchange rate on long-term investment decisions of Indian manufacturing firms at the sector level.Design/methodology/approachThe study is undertaken on a sample of 1,222 firms from six key manufacturing sectors of Indian economy during the period 2000-2016. The non-linear relationship between real exchange rate and long-term investment is studied using the two-step generalized model of moments estimator.FindingsThe study finds a concave (i.e. inverted U-shaped) relationship between the long-term investment and real exchange rate, particularly in case of chemical, construction, machinery and textile sector, in particular, and Indian manufacturing industry as a whole. It implies that investments in these sectors increase with depreciation of real exchange rate up to a point of inflection and subsequent to which it starts decreasing if exchange rate continues to depreciate further. But consumer goods and metal product sectors ensure a convex pattern, which demonstrates that investment is decreasing at the initial stage of depreciation of the exchange rate. The study moves one-step forward in validating this nexus between investment and exchange rate with respect to the price-cost margin and the extent of financial flexibility of firms. It is found that high price cost margin and financial flexibility moderates the adverse impact of exchange rate depreciation and immunizes the long-term investments in the scenario of a weak domestic currency and induce long-term investments.Research limitations/implicationsThe study measures the impact of exchange rate changes, but the impact of exchange rate volatility on investment has not been studied, which is absolutely different with different implications.Practical implicationsThe study provides a clear guideline to firm managers for using the exchange rate movements in a favorable manner. The findings can be used to ensure sustainable long-term investments with respect to the core competence of firms in terms of price cost margin and financial flexibility at sector level of Indian manufacturing firms.Originality/valueThe study analyzes the non-linear relationship between exchange rate changes and long-term investment behavior of manufacturing firms from six key sectors of India. Further, the study moves one step forward to analyze this nexus under different scenarios of financial flexibility and price cost margin using dynamic panel models.

Real exchange rate and investment in the Brazilian manufacturing industry

2016 ◽  
Vol 43 (2) ◽  
pp. 288-308 ◽  
Author(s):  
Carolina Troncoso Baltar ◽  
Celio Hiratuka ◽  
Gilberto Tadeu Lima
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Industrial Development ◽  
Manufacturing Industry ◽  
Panel Data Analysis ◽  
Empirical Literature ◽  
Content Type ◽  
The Real ◽  
Manufacturing Sectors ◽  
The Impact

Purpose – The purpose of this paper is to study the impact of the real exchange rate on investment in the Brazilian manufacturing industry. Design/methodology/approach – The authors develop an investment model that considers the effect of changes in the real exchange rate, taking into account that the effect of the real exchange rate on the Brazilian manufacturing investment operates through demand and cost channels. The composition of these effects varies across manufacturing sectors, with different repercussions on investment decisions, depending on sectoral characteristics. A panel data analysis is applied to estimate the model for the Brazilian manufacturing sectors from 1996 to 2010. Findings – One main result is that the responsiveness of the Brazilian manufacturing investment to real exchange rate varies considerably across manufacturing sectors. Overall, the results contribute to a better understanding of the relationship between exchange rate dynamics, manufacturing investment and industrial development, thus unveiling important empirical elements for the debate on industrial policies to stimulate manufacturing investment and production. Originality/value – As the (scant) empirical literature on real exchange rate and investment in Brazil has invariably been using aggregate data, this paper contributes to the literature by obtaining sectoral estimates of the responsiveness of manufacturing investment to exchange rate fluctuations that further the understanding of the complex relationship between these economic variables.

The long-run interrelationship between exchange rate and interest rate: the case of Mexico

2019 ◽  
Vol 46 (7) ◽  
pp. 1380-1397 ◽  
Author(s):  
Salvatore Capasso ◽  
Oreste Napolitano ◽  
Ana Laura Viveros Jiménez
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Real Exchange Rate ◽  
Real Interest Rate ◽  
Content Type ◽  
Long Run ◽  
Monetary Authorities ◽  
The Exchange Rate ◽  
The Interest Rate

Purpose The purpose of this paper is to analyse the long-term nature of the interrelationship between interest rate and exchange rate. Design/methodology/approach By employing Mexican data, the authors estimate a non-linear autoregressive distributed lags (NARDL) model to investigate the nature of the changes and the interaction between interest rate and exchange rate in response to monetary authorities’ actions. Findings The results show that, contrary to simplistic predictions, the real exchange rate causes the real interest rate in an asymmetric way. The bounds testing approach of the NARDL models suggests the presence of co-integration among the variables and the exchange rate variations appear to have significant long-run effects on the interest rate. Most importantly, these effects are asymmetric and positive variations in the exchange rate have a lower impact on the interest rate. It is also interesting to report that the reverse is not true: the interest rate in the long-run exerts no statistical significant impact on the exchange rate. Practical implications The asymmetric long-term relationship between real exchange rate and real interest rate is evidence of why monetary authorities are reluctant to free float exchange rate. In Mexico, as in most developing countries, monetary policy strongly responds to exchange rate movements because these have relevant effects on commercial trade. Moreover, in dollarized economies these effects are stronger because of pass-through impacts to inflation, income distribution and balance-sheet equilibrium (the well-known “original sin”). Originality/value Under inflation targeting and flexible exchange rate regime, despite central banks pursue the control of short-term interest rate, in the long-run one could observe that it is the exchange rate that influences the interest rate, and that this reverse causality is stronger in emerging economies. This paper contributes by analysing the asymmetric relationship between the variables.

Exchange rate misalignment and economic growth in India

2017 ◽  
Vol 9 (4) ◽  
pp. 414-434
Author(s):  
Vaseem Akram ◽  
Badri Narayan Rath
Keyword(s):  
Economic Growth ◽  
Exchange Rate ◽  
Real Exchange Rate ◽  
Structural Break ◽  
Annual Data ◽  
Content Type ◽  
Distributed Lag ◽  
Exchange Rate Misalignment ◽  
The Exchange Rate ◽  
The Impact

Purpose The purpose of the paper is to examine the impact of exchange rate misalignment on economic growth in India using annual data from 1980 to 2014. Design/methodology/approach First, misalignment is measured, which is defined as the deviations of the actual real exchange rate (RER) from its equilibrium level. The equilibrium real exchange rate (ERER) is estimated using the auto-regressive distributed lag (ARDL) model by considering key macroeconomic fundamentals of the determinants of RER. Zivot and Andrews’ unit root with structural break is used to test the stationarity property of data. The impact of exchange rate misalignment on economic growth has been examined using ARDL and variance decomposition techniques. Findings Our results find an overvaluation of the exchange rate till 2000, and thereafter, an undervaluation of the exchange rate prevails in India. Further, the result indicates that an increase in exchange rate misalignment leads to a decrease in economic growth and vice versa. Moreover, a positive misalignment (overvaluation) hurts the economic growth and a negative misalignment (undervaluation) promotes the economic growth. Research limitations/implications From the policy perspective, the results highlight that India needs to maintain an appropriate exchange rate which can reduce the RER misalignment. It is better for the Reserve Bank of India (RBI)’s intervention to smoothen the fluctuations of the exchange rate to avoid the inefficiency in the allocation of resources. However, to minimize the RER misalignment, the intervention should be conducted only in the short run. Originality/value The study contributes to the existing literature by estimating the exchange rate misalignment for India and its impact on economic growth.

scholarly journals The dynamic response of the rand real exchange rate to fundamental shocks

2016 ◽  
Vol 43 (1) ◽  
pp. 108-121 ◽  
Author(s):  
Mehmet Balcilar ◽  
Rangan Gupta ◽  
Charl Jooste
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Real Exchange Rate ◽  
South African ◽  
Impulse Responses ◽  
The South ◽  
Content Type ◽  
The Exchange Rate ◽  
The Relationship ◽  
Over Time

Purpose – The authors analyse the relationship between the South African real exchange rate and economic fundamentals – demand, supply and nominal shocks. The paper aims to discuss these issues. Design/methodology/approach – The authors use a time-varying parameter VAR to study the coherence, conditional volatility and impulse responses of the exchange rate over specific periods and policy regimes. The model is identified using sign-restrictions that allow for some neutrality of impulse responses over contemporaneous and long horizons. Findings – The results suggest that the importance of fundamental shocks on the exchange rate is time dependent. Hence there is a loss in information when using standard linear models that average out effects over time. The response of the exchange rate to demand and supply shocks have weakened over the 1994-2010 period. Research limitations/implications – The period following financial crisis has strengthened the relationship between supply and demand shocks to the exchange rate, but has weakened the relationship between interest rate shocks and the exchange rate response. Practical implications – This paper provides deeper insight as to how the exchange rate responds to fundamental shocks. This should help monetary policy understand the consequences of interest rate decisions on the exchange rate and the indirect effect of inflation on the exchange rate. Originality/value – This application is new to the South African literature. The authors propose that the use of interest rates is limited in affecting the value of the rand exchange rate over particular periods. Isolating fundamental shocks to exchange rates over time helps policy makers make clearer and more informed decisions.

On the Exchange Rate Policy

2010 ◽  
pp. 21-28
Author(s):  
K. Yudaeva
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Inflation Targeting ◽  
Exchange Rate Policy ◽  
Institutional Changes ◽  
Crisis Period ◽  
Local Currency ◽  
High Inflation ◽  
Rate Policy ◽  
The Exchange Rate

The level of trust in the local currency in Russia is very low largely because of relatively high inflation. As a result, Bank of Russia during crisis times can not afford monetary policy loosening and has to fight devaluation expectations. To change the situation in the post-crisis period Russia needs to live through a continuous period of low inflation. Modified inflation targeting can help achieve such a result. However, it should be amended with institutional changes, particularly development of hedging instruments.

Macroeconomic fundamentals and dynamics of the Indian rupee-dollar exchange rate

2015 ◽  
Vol 7 (4) ◽  
pp. 301-326 ◽  
Author(s):  
Chandan Sharma ◽  
Rajat Setia
Keyword(s):  
Exchange Rate ◽  
Structural Break ◽  
Cointegration Analysis ◽  
Least Square ◽  
Dollar Exchange Rate ◽  
Content Type ◽  
Macroeconomic Variables ◽  
Indian Rupee ◽  
Macroeconomic Fundamentals ◽  
The Impact

Purpose – This paper aims to examine the relationship between Indian rupee-US dollar exchange rate and the macroeconomic fundamentals for the post-economic reform period. Design/methodology/approach – The authors have used an empirical model which includes a range of important macroeconomic variables based on the basic monetary theories of exchange rate determination. At the first stage of the analysis, they have tested structural break in the data. Subsequently, they have employed the fully modified ordinary least square, Wald’s coefficient restriction and impulse response functions (IRF) to estimate the monetary model in the long- and short-run horizons. Findings – Results of analyses indicate that the macroeconomic fundamentals determine exchange rate in a significant way, but their effect varies sizably across the periods. The IRF illustrate the importance of interest rate in controlling exchange rate volatility. Practical implications – The analysis of the behavior of inter-relationship among macroeconomic variables will help policymakers in a deep-rooted understanding of this complex and time-varying relationship. Originality/value – Most of the existing studies have tested the impact of a single or a few macroeconomic fundamentals on exchange rate. But in the present study, we have tested the impact of a range of important variables, i.e. money supply, real income or output, price level and trade balance. Further, considering the importance of structural breaks in data, they authors have employed standard tests of structural break and incorporated the issue in the cointegration analysis.

Exploring the relationship between macroeconomic indicators and sovereign credit default swap in Pakistan

2017 ◽  
Vol 18 (4) ◽  
pp. 368-380
Author(s):  
Abdul Rashid ◽  
Farooq Ahmad ◽  
Ammara Yasmin
Keyword(s):  
Exchange Rate ◽  
Credit Default Swap ◽  
Content Type ◽  
Macroeconomic Variables ◽  
Long Run ◽  
Credit Default ◽  
Macroeconomic Indicators ◽  
Short Run ◽  
The Exchange Rate ◽  
The Interest Rate

Purpose This paper aims to empirically examine the long- and short-run relationship between macroeconomic indicators (exchange rates, interest rates, exports, imports, foreign reserves and the rate of inflation) and sovereign credit default swap (SCDS) spreads for Pakistan. Design/methodology/approach The authors apply the autoregressive distributed lag (ARDL) model to explore the level relationship between the macroeconomic variables and SCDS spreads. The error correction model is estimated to examine the short-run effects of the underlying macroeconomic variables on SCDS spreads. Finally, the long-run estimates are obtained in the ARDL framework. The study uses monthly data covering the period January 2001-February 2015. Findings The results indicate that there is a significant long-run relationship between the macroeconomic indicators and SCDS spreads. The estimated long-run coefficients reveal that both the interest rate and foreign exchange reserves are significantly and negatively, whereas imports and the rate of inflation are positively related to SCDS spreads. Yet, the results suggest that the exchange rate and exports do not have any significant long-run impact on SCDS spreads. The findings regarding the short-run relationship indicate that the exchange rate, imports and the rate of inflation are positively, whereas the interest rate and exports are negatively related to SCDS spreads. Practical implications The results suggest that State Bank of Pakistan should design monetary and foreign exchange rate polices to minimize unwanted variations in the exchange rate to reduce SCDS spreads. The results also suggest that it is incumbent to Pakistan Government to improve the balance of payments to reduce SCDS spreads. The findings also suggest that the inflation targeting policy can also help in reducing SCDS spreads. Originality/value This is the first study to examine the empirical determinants of SCDS spreads for Pakistan. Second, it estimates the short- and long-run effects in the ARDL framework. Third, it considers both internal and external empirical determinants of SCDS spreads.

العلاقة التبادلية بين سعر الصرف وأسعار الأسهم دراسة تطبيقية في سوق اسطنبول للأوراق المالية للمدة 2005-2020

2021 ◽  
Vol 1 (1) ◽  
Author(s):  
سعدالله ألنعيمي
Keyword(s):  
Exchange Rate ◽  
Stock Prices ◽  
Negative Impact ◽  
Reciprocal Relationship ◽  
Nominal Exchange Rate ◽  
Share Price ◽  
Theoretical Interpretation ◽  
Short Term ◽  
The Exchange Rate

The study aims to analyzing the reciprocal relationship between the nominal exchange rate of the Turkish lira versus the U.S. dollar and the stock prices of the companies listed on the Istanbul Stock Exchange (ISE) expressed in the general market index for the period from 2005 to 2020 with 192 monthly observations, based on the traditional theory and the theory of portfolio balance model in theoretical interpretation for that relationship, aiming to identify the effect of the exchange rate on stock prices, as well as to analyze the causal relationship between those variables and to identify which of them is the cause or which is the result, using the Autoregressive Distributed Lag (ARDL) model. The research found that the exchange rate has a positive effect on stock prices in the long term, despite the emergence of the negative impact in the short term, but the long-term relationship has corrected the course of the short-term relationship with a time period not exceeding one month, in addition to proving that this relationship takes one direction. From the exchange rate towards stock prices, that is, the exchange rate is the reason and stock prices are the result, therefore the results of this research helps investors to predict future trends of stock prices depending on the exchange rate changes, and it also enables the companies, especially those with foreign transactions, to manage price risks the exchange rate in order to avoid its negative impact on its share price, as it represents an obstacle to achieving its main goal of maximizing the share price

Board Gender Diversity and Cost of Debt: Do Firm Size and Industry type matter?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Rabiatu Kamil ◽  
Kingsley Opoku Appiah
Keyword(s):  
Firm Size ◽  
Developing Economies ◽  
Gender Diversity ◽  
Manufacturing Firms ◽  
Least Square ◽  
Cost Of Debt ◽  
Content Type ◽  
Industry Type ◽  
Gender Diverse ◽  
Board Gender Diversity

Purpose This study aims to investigate the nexus between gender-diverse boards and cost of debt in the developing economies context. Specifically, the authors examine whether firm size moderates the relationship between female board representation and cost of debt, regardless of the industry type. Design/methodology/approach The authors use panel data from 17 non-financial listed Ghanaian firms over the period 2007–2017, ordinary least square, two-stage least square and generalised method of moments estimations to test the hypothesis. Findings The authors find that board gender diversity is positively related to cost of debt. Further evidence suggests the interaction of firm size and board gender diversity displays a negative association with cost of debt. Practical implications The study evidence suggests larger non-manufacturing firms with gender-diverse boards attract lower cost of capital in an environment with lax enforcement of rules and regulations in corporate governance. Social implications Lenders consider the size and industry of firms in pricing debt. This has implications on UN Goal 5, highlighting that shareholders of larger non-manufacturing firms benefit immensely from board gender diversity in the context of debt. Originality/value The authors contribute to the board gender diversity and cost of debt literature by demonstrating that firm size and industry type matter in the developing economies context.

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