Effects of Changing Pattern of Corporate Savings on Firm Profitability in India: A New Approach

Abstract

This chapter applies the semiparametric method to analyse the effects of increase in corporate savings since 2002, and some other factors, on changes in the distribution of profitability of corporate firms in India. Comparing the two post-2002 years, 2007 and 2010 with the pre-2002 year 2001, we observe a rightward shift in the distribution of profitability implying an across-the-board increase in profitability of all firms after 2002. Two factors that explain the change are changes in interaction between capital structure and business group affiliation and changes in other firm characteristics such as size, age, growth opportunities and market share which played the major role in explaining the changes in distribution of profitability of firms measured in terms of Tobin’s q as well as return on assets (ROA). Our findings show that if these two factors were at the pre-2002 level, firm profitability would have been higher in the post-2002 years. Two firm characteristics viz. size and market share played some major role in explaining the changes in distribution of profitability of firms measured in terms of ROA but not in terms of Tobin’s q. Finally, from our findings we infer that the costs of group affiliation are likely to exceed the benefits in India. Thus, encouraging business group affiliation is not always desirable in order to improve firm performance in an emerging market like India.