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Abstract
In this paper an attempt has been made to identify the important determinants of retained earnings in profitable steel companies in steel sector of India and which have impact on the retention of earnings of steel companies under study. Multiple linear regression is used to identify the determinants of retained earnings for a period of sixteen years. Also the importance of retained earnings as a source of finance for steel sector companies is also studied in the paper.
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... Retained earnings are accumulated portions of previous net profits undistributed to the shareholders. Instead, these amounts are retained as required funds to execute future management plans such as the need for growth, new positive investing, expansion, acquisitions, repurchases, raising capital, diversifying products and services, and opening new branches (Harvey 2012;Ball 2013;Masood 2017;Thirumalaisamy and Al Baloushi 2017;Yemi and Akinadewo 2018;Okechukwu and Ekweronu 2020). Retained earnings form a substantial portion of the shareholders' wealth. ...
... Shareholders' wealth is defined as "the product of the number of shares owned by the shareholders multiplied by the current share price in the capital market plus the dividends received in the following year" (Botha et al. 1987). Retained earnings also represent an idle internally generated fund and represent the cheapest and easiest option to raise the shareholders' capital compared to the other two available options of raising new equity or resorting to debt (Myers and Majluf 1984;Masood 2017;Thirumalaisamy 2020). ...
The aim of this study was to investigate the effect of the retention per share compared to the dividend per share by modeling the firm's market value as a function of the retention per share and the dividend per share for all firms in the Jordanian context using unbalanced panel data analysis for a sample of 2281 firm years covering the period from 2010 to 2021. The results of the pooled sample indicated a strong positive significant effect for dividends per share. However, the retention per share indicated a negative significant effect on the firm's market value. The other robustness analysis for the two sub-samples and the financial and non-financial sub-samples indicated the same results, consistent with the pooled sample for the two main explanatory variables.
... Retained earnings are an important source of internal or self-financing by a company. Masood (2018) submits that the savings generated internally by a company in the form of retained earnings are ploughed back into the company for diversification of its business. Retention of earnings by banks reduces their dependence on funds from external sources to finance their regular business needs (Masood, 2018). ...
... Masood (2018) submits that the savings generated internally by a company in the form of retained earnings are ploughed back into the company for diversification of its business. Retention of earnings by banks reduces their dependence on funds from external sources to finance their regular business needs (Masood, 2018). However, Investopedia (2020) defined retained earnings as the amount of net income left over for the business after it has paid out dividends to its shareholders. ...
The study examined the determinants of retained earnings of deposit money banks in Nigeria. Retained earnings were the dependent variable, while total assets and total deposits were the independent variables of the study. The study adopted an ex-post-facto research design, covering the period between 2010 and 2019. Secondary data were extracted from the annual reports and accounts of sampled deposit money banks in Nigeria. Spearman Covariance analysis was used for the test of hypotheses. From the data analysis, total assets and total deposits have a strong and positive relationship with retained earnings. This implies that total assets and total deposits can be used to predict the retained earnings of deposit money banks in Nigeria. The study, therefore, recommends that deposit money banks in Nigeria should strive to increase their asset base by investing in land and buildings and also ensure that every asset at their disposal is effectively and efficiently managed to yield more profit and subsequently increase their retained earnings for further investments and/or recapitalization. They should engage in promotions and other programmes that will encourage customers to keep their cash with them. This will provide them with additional funds to provide loans and make other investments to increase their revenue and retained earnings.
... The implication of this study, among others, is that adequate shareholders' funds can serve as a veritable stimulant in strengthening the performance of Nigeria's deposit money banks and also heighten the confidence of customers, especially in this era of global economic meltdown that has taken its toll in the Nigerian financial system. Masood (2017) evaluated the determinants of retained earnings in the profitability of cement companies in the cement sector of India. Multiple linear regression is used to identify the determinants of retained earnings for sixteen years. ...
The study examined the effect of statutory reserves and bank branches on the revenue reserves of deposit money banks in Nigeria. Retained earnings were the dependent variable. The study adopted an ex-post-facto research design, covering the period between 2010 and 2019. Secondary data were extracted from the annual reports and accounts of sampled deposit money banks in Nigeria. Multiple regression analysis was used for the test of hypotheses. The study of the regression analysis revealed that statutory reserves have a significant and negative effect on the revenue reserve of deposit money banks in Nigeria. Furthermore, the number of branches of deposit money banks had no significant effect on their revenue reserves. The findings imply that statutory reserves can be used to predict and make decisions on retained earnings of deposit money banks in Nigeria. The study, therefore, recommends that banks focus on working on technicalities that will enable them to reduce their statutory reserve. However, the CBN should give the banks more freedom to have in-house retention than reserving with the CBN. This is because when it is reduced, there will be more loanable funds at the disposal of deposit money banks, and their profitability chances increase as well. Also, the insignificant effect of the number of branches indicates that the firms should not see an increase in the number of their branches as the solution to higher revenue reserves
In this paper an attempt has been made to identify the important determinants of retained earnings in profitable steel companies in steel sector of India and which have impact on the retention of earnings of steel companies under study. Multiple linear regression is used to identify the determinants of retained earnings for a period of sixteen years. Also the importance of retained earnings as a source of finance for steel sector companies is also studied in the paper.
This paper analyses the financing and investment pattern of non-financial, non-government, public limited firms over the period 1971-72 to 1999-2000, at an aggregate and disaggregate level of major industry groups. On the sources side, the financing pattern of Indian firms is found to be debt based and different from that in developed countries and other emerging markets, but their share of internal sources increased markedly in the latter half of the 1990s. On the investment side, inventory investment has shown a secular decline, while investments in financial assets are on the rise. The relationship pattern between sources and uses of funds contrasts with the pattern observed for US firms, where market imperfections lead to fixed investments having a high positive association with cash flows and a high negative association with debt.
Purpose
To investigate the relations between company‐specific financial factors and the capital structure decisions of Estonian non‐financial companies and to examine behavioral differences between companies of different sizes.
Design/methodology/approach
Totally 260 Estonian non‐financial companies are divided into small‐, medium‐ and large‐companies, each sample being analysed by correlation‐regression method in two aspects – impact of financial factors on static capital structure and capital structure dynamics. Companies' financial statements of 2002/2003 or 2003/2004 are used. Finally, capital structure adjustments in extreme boundaries are analyzed.
Findings
Capital structure decisions among Estonian non‐financial companies are driven by the pecking order theory, the evidences supporting optimal capital structure choices in long run remain weak. The robustness of the pecking order behavior significantly differs between smaller and bigger companies.
Research limitations/implications
Limited number of companies surveyed due to hard manual work required to adjust financial accounts. Implication of findings is somewhat limited as the study covers a single country.
Originality/value
The paper helps to identify financial drivers and to understand motivations behind capital structure decisions of emerging market companies and it supplements earlier studies. Quasi‐equity debt distorts the observed capital structures. Capital structure is adjusted for operating leases and quasi‐equity debt to identify true amount put at risk and its mix between owners and external lenders.
This study presents a very realistic objective of the firm, which is consistent with organizational behavior. It is being proposed that: The firm sets as its objective the control of the optimum amount of financial capital at the minimum cost to the firm. As evidenced by the large portfolios of marketable equity securities held by non-financial firms, the firm hoards financial capital in order to ensure future availability. There is a holding or storage cost; that is, in pursuing this objective, the firm incurs (pays) a premium to ensure control over an attained level of financial capital. This study maintains that this cost is tantamount to a premium as in the case of an insurance policy. Thus, corporate earnings retention is a case of optimization under uncertainty and dividend policy is viewed as an instrument of risk management. This objective, which addresses the underinvestment problem, fills the gap on what the firm should maximize and provides an alternative to the debatable maximization of shareholders' wealth.
Firm value is influenced in many direct and indirect ways by financial risks which consist in unexpected changes of foreign exchange rates, interest rates and commodity prices. The fact that a significant number of corporations are committing resources to risk management activities, however, represents only an indication for the potential of corporate risk management to increase firm value. This paper presents a comprehensive review of positive theories and their empirical evidence regarding the contribution of corporate risk management to shareholder value. It is argued that because of realistic capital market imperfections, such as agency costs, transaction costs, taxes, and increasing costs of external financing, risk management on the firm level (as opposed to risk management by stock owners) represents a means to increase firm value to the benefit of the shareholders.
Several economists have argued that capital markets in less-developed countries are fragmented. Fragmented capital markets retard the efficient allocation of resources and force business firms to rely on internal sources of funds. Using firm-level data, the authors examine the importance of the accelerator, internal funds, and depreciation for investment by manufacturing firms in India. The results indicate that internal funds and depreciation have significant explanatory power in a sales accelerator model of investment and that there exists heterogeneity among firms in the link between internal funds and investment. In particular, internal funds are relatively more important for large firms and firms that produce luxury goods.
The cross-sectional trends in dividends are investigated at an aggregate level of ownership (i.e. closely/largely held and regulated firms), and at disaggregate level across 20 industries to examine how Indian Private Corporate Sector appropriated its profits over 1961-2007 periods. Alternatively it is examined whether internal funds are a significant source of finance and the dynamics of relation between dividends relative to earnings across type of companies and industries. Indian corporate sector pays relatively more equity dividends than preference dividends. Other things being equal, the probability of paying cash dividends decreases with share holder concentration and the regulated companies pay relatively larger dividends. Dividend payouts for all type of firms decline, and such tendency is more pronounced after liberalization periods indicating a greater choice of internal financing through retained earnings. The analysis of inter-corporate and inter-industry variations reveals that dividends interplays differently with exogenous factors.
Regional capital expenditures, which reflect regional flows of financial capital, are a function of the aggregate of individual firms' behavior. Hence, the allocational efficiency of the regional flows of financial capital may be affected by the manner--internal versus external--in which financial capital becomes available to manufacturing firms. Allocational inefficiency (sub-optimal allocation of financial capital) could obtain since corporate retained earnings - the amount of funds that are internally available to large firms - are only minimally subject to the market rationing process. Even though the capital market is cleared, it may do so without providing for the efficient allocation of financial capital. The existence of differential rates in regional financial markets may reflect the costs associated with the use of funds in a truncated or discontinuous national capital market. Accordingly, equilibrium experienced in the capital market may exist under non- Paretian conditions. This paper attempts to determine whether the allocation of regional financial capital flows is efficient as suggested by the neoclassical model (NCM). Specifically, the study attempts to ascertain whether corporate retained earnings model (CREM) is a better predictor of the regional flow of financial capital than the NCM. In accordance with the NCM, for the period under study, it is hypothesized that: regions with high rates of return are regions with high growth rates of corporate income that experience lower variability of annual capital investments than regions with low rates of return. In accordance with the CREM, it is postulated that regions with high average annual capital investment-output ratios are regions with high corporate income and low average rates of return on corporate assets. Surrogate measures of financial capital flows and the volatility of such flows were used. The test results, which may not be generalizable beyond the study period, suggest that the CREM may be a better predictor of the regional flow of financial capital than the NCM and that the financial capital rationing process for regional manufacturing investments may be inefficient. The finding, that the corporate earnings retention influences the flow of financial capital, does suggest that the NCM does not always hold. This study should enhance the understanding of regional flows of financial capital and the models (revolving around the state- region and industry region) used in the study refine and extend the scope of regional economic analysis.
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