It is my pleasure to bring you Volume 33, Issue 3, September 2021, of the journal, with its complement of research articles. Following is a brief introduction to the contents of the issue.
With the increasing trend towards digitisation, the amount of information about customer behaviour available at a company’s disposal has increased tremendously, providing opportunities for effective design of marketing strategies. Researchers are increasingly investigating the relationship between customer behaviour and size of wallet (SOW), which is the measure of the spend capacity of a customer on a particular product category across different firms. In “Size of wallet estimation: Application of K-nearest neighbour and quantile regression”, Aashish Jhamtani, Ritu Mehta, and Sanjeet Singh contribute to the bottom-up suite of methodologies to estimate SOW using machine learning techniques. They use two quantile modelling approaches, namely K-nearest neighbour and quantile regression , in estimating SOW and compare their results. The dataset used for analysis is a publicly available dataset at UC Irvine repository which includes information on yearly spending in monetary units on different product categories for clients of a wholesale distributor. They use machine learning based clustering techniques to segment the customers by size and industry to generate better estimates for SOW. Finally, they compare the two quantile modelling techniques by comparing their error and discriminatory power. Based on the SOW and opportunity estimates, a company can decide its target segment and design specific marketing strategies, thereby improving its profitability.
In “Are internal governance mechanisms efficient? Case of a developing economy”, Mehul Raithatha and Arunima Haldar examine the relationship between internal corporate governance mechanisms and corporate financial performance taking into account the endogeneity between corporate governance and firm characteristics (such as capital structure and ownership structure). They utilise a sample of 500 large listed Indian firms for the period 2008 to 2011, and construct and validate a corporate governance index (CGI) based on six internal governance mechanisms affecting the governance of Indian firms.
Their empirical model captures the overall governance using the bundles approach, and empirically validates the corporate governance measure utilising the construct validity approach. Overall, the findings suggest the advantages of better corporate governance practices in economies characterised by ownership concentration, which indirectly results in improving financial performance. The analysis of the Indian industries provides evidence that corporate governance has long term implications for firms aspiring to enhance their performance.
Despite considerable prior research on the influence of politically connected firms (PCFs) on firm performance, the exact nature of this relationship remains inconclusive. In “Political connections and firm performance: Further evidence from generalised quantile regression approach”, Faisal Shahzad, Asif Saeed, Ghazanfar Ali Asim, Fiza Qureshi, Ijaz Ur Rehman, and Saba Qureshi assess the annual data of 190 listed Pakistani firms, including politically connected and non-politically connected firms, over the period 2007–2014. They examine the association between political connectedness and firm performance by applying the generalised quantile regression method, which, in their estimation, provides advantage over traditionally used ordinary least squares technique as it ascertains the magnitude and intensity of the influence of PCFs on high-performing and low-performing firms and handles potential endogeneity problem; it also provides a better understanding of the relationship between PCFs and firm performance.
The findings depict negative association between PCFs and firm performance. In addition, the negative linkage is stronger for low-performing firms compared to high-performing firms. The analysis unravels that the political connections of the board directors impact firm performance negatively in different performance distributions. The results of this study are in line with the proposition that easier access to finance and increased rent-seeking activities make PCFs less profitable.
In “Virtuousness and un/ethical behaviour: The moderating role of power distance culture in select Indian public sector undertakings”, Sunil Budhiraja and Sanjay Modi examine both forms of ethical behaviour, ethical and unethical, in two public sector undertakings to study the direct relationship between the perceived virtuousness of managers and the two forms of ethical behaviour. They develop a conceptual framework with virtuousness as an independent variable, and both forms of ethical behaviour as dependent variables, while keeping power distance as a moderating variable. The sample for their study consisted of 256 managers working in the two Indian public sector undertakings. As a result of exploratory factor analysis two forms of ethical behaviour, namely manipulative behaviour and behaviour of being fair and responsible, were extracted. Multiple regression analysis and moderated hierarchical regression were deployed to assess the relationship between managers’ virtuousness and both forms of un/ethical behaviours and to examine the moderating role of power distance culture prevailing in the organisations.
The study confirms the existence of a strong cause and effect relationship between managers’ virtues and both ethical and unethical behaviours including manipulative behaviour and behaviour of being fair and responsible. The regression analysis confirms the positive effect of virtuousness on behaviour of being fair and responsible whereas manipulative behaviour is negatively associated with virtuousness. The most substantial finding of the study confirms the role of power distance in moderating the relationship between virtuousness and ethical behaviour. The findings suggest that organisations with high power distance culture exhibit strong influence of level of virtuousness on fair and responsible behaviour in comparison to low power distance culture organisations. The findings of the study could be instrumental in policy formulation around workplace ethics.
In “Does CEO duality affect board independence? Moderating impact of founder ownership and family blockholding”, Shashank Bansal and Thenmozhi M examine the impact of CEO duality on board independence and explore if the type of firm, family blockholding, and concentrated founder ownership moderate the impact of CEO duality on board independence. Based on fixed effect panel data regression on a sample of 11,625 firm-year observations covering over 1132 Indian firms listed on the National Stock Exchange, for the period 2001-2015, they find that firm leadership structure affects the board structure of the firm and CEO duality has a significantly positive association with board independence decisions.
The results support the theory of reputation and show that business group firms dominated by family encourage board independence if firms have duality leadership structure compared to non-family business groups, stand-alone, state-owned, and foreign-owned firms. The study also finds that the entrenchment effect of controlling shareholding on board independence overcomes the alignment effect of CEO duality, and the results are more pronounced for firms with low level of information cost and high level of monitoring.
Weather-related news is known to be of macroeconomic significance, and the Indian summer monsoon is one such phenomenon which has implications for the performance of a wide range of industry sectors. In “Effect of the monsoon forecast announcement on stock returns”, Viswanathan Nagarajan, Raja R. Reddy Singareddy, and Kulbir Singh assemble a dataset of the initial and updated Indian summer monsoon rainfall (ISMR) forecasts made by the Indian Meteorological Department from 1999 to 2015, and use event study methodologies to assess the effect of the announcements on constituent stocks of the S&P CNX 500 index.
They find that the market does appear to respond positively to forecasts of normal ISMR and negatively to forecasts of below normal ISMR. The results show interesting combinations of pre-event and post-event cumulative average abnormal returns (CAARs), which vary from sector to sector with stocks in monsoon-sensitive sectors showing stronger responses. The post-initial forecast announcement CAARs for CNX 500 stocks are statistically significant, and are positive for normal forecasts and negative for below normal forecasts. Furthermore, the pre-announcement CAARs are statistically significant but unexpectedly positive for both the types of forecasts. They also provide evidence indicating that investors rationally allocate their attention towards pricing the effect of the ISMR forecast on large stocks.
In the final article of the issue, “Monetary policy and liquidity: Does investor sentiment matter?”, Byomakesh Debata, Saumya Ranjan Dash, and Jitendra Mahakud examine the relationship between monetary policy and liquidity at macro level (for overall market) and micro level (for individual stocks) in a pure order-driven emerging stock market such as India. They also examine the possible asymmetries in the effects of monetary policy on stock market liquidity in different market regimes i.e., periods of high and low investor sentiment. In their study, they consider stocks listed on the National Stock Exchange (NSE) of India for the sample period April 2002 to March 2015, with 510 firms conforming to the stock selection criteria, and hence constituting the study sample.
They examine the monetary policy effects on the aggregate stock market liquidity using a vector autoregressive (VAR) framework and VAR Granger-causality test. They carry out impulse response functions analysis to elucidate the response of each stock market liquidity measure for unit positive shock applied to monetary policy variables. They carry out variance decomposition to analyse the percentage of stock market liquidity explained by monetary policy variables, and use panel fixed effects model to trace the effect of monetary policy on the liquidity of individual stocks. For robustness test, they address the issue of the structural break and carry out empirical analysis using two sub-samples. They construct a sentiment index using seven implicit orthogonal sentiment proxies and examine the robustness of their findings during high and low sentiment periods.
The study documents strong predictability of monetary policy on liquidity at an aggregate market level, and for individual stocks. The results reveal that an expansionary monetary policy (lower interest rate or higher money supply) enhances stock market liquidity. Furthermore, the robustness test results reveal that investor sentiment plays an important role in the asymmetric effect on the monetary policy--stock market liquidity relationship. The effect of monetary policy on liquidity is stronger during low sentiment (pessimistic) periods as compared to high sentiment (optimistic) periods.
The IMR Doctoral Conference (IMRDC) 2022, co-organised by IIMB Management Review and the Office of the Doctoral Programme, is scheduled to be held in virtual mode, on the 20th, 21st and 22nd January, 2022 and we anticipate three days of paper presentations by doctoral scholars from leading institutions, and talks by eminent researchers, academics, and practitioners. We look forward to your participation in IMRDC 2022. Please visit https://www.iimb.ac.in/imr-doctoral-conference for more information on the conference.
With best wishes,
Jishnu Hazra
Editor-in-Chief
IIMB Management Review
E-mail address: eic@iimb.ac.in
