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RESEARCH
Dr. Bindiya Kunal Soni & : A Study on Leverage Analysis and Pro tability
Dr. Jigna Trivedi for Selected Paint Companies in India
Anitha Thomas & OCTAPACE the work values and Psychological Contract :
:
Prof. Avijan Dutta An Investigation in a Hotel Business
6. Subscription Form 47
Abstract
O
ne of the ways to increase value or impact of
Dr. Bindiya Kunal Soni resource is to use leverage. Traditionally,
leverage was viewed from the perspective
Assistant Professor
of financial leverage which arises from financing
Anand Institute of Management activities. However, operating leverage arising from
Anand the operating activities of business is also used
E-mail : drbindiyasoni@gmail.com extensively these days. Alongwith the trends of
financial leverage, operating leverage, combined
& leverage, debt-equity ratio and EPS of the paint
companies over a period of ten years (2003-2012),
Dr. Jigna Trivedi the present study makes an attempt to analyse the
impact financial leverage and combined leverage on
Assistant Professor
the profitability (measured through Earning Per
Shri Jairambhai Patel Institute of Share “EPS”) of the selected paint companies of
Business Management and Computer India. The findings suggest that financial leverage
Applications had no significant relationship on profitability and
Gandhinagar the returns were observed to be more volatile in case
E-mail : jigna2804@gmail.com of Shalimar and AkzoNobel paints as compared to
other paint companies in the sample.
4 TIMS - QUEST
Kumar's (2007) exhaustive conceptual work highlighted the absence of common
consensus on universal factors responsible for determining financial leverage. He
theoretically concluded that leverage irrelevance, static trade off, pecking order,
asymmetric information signaling framework were treated as important underpinnings
which determined firm's financial leverage. An empirical paper based on secondary data
analysis was contributed by Negi et al. (2012). The paper examined the effect of financial
leverage on the shareholder's return and market value of 50 Indian companies listed on
NSE and BSE across different sectors, to traditionally examine the effect on earnings per
share, dividend pay-out ratio and price-earnings ratio. Pachori and Totala (2012) found
no significant influence of financial leverage on shareholders return and market
capitalization for Automotive Cluster Companies of Pithampur (M.P.), India.
Operating leverage refers to the firm's fixed production costs and the concept is in the
nascent stage. Irrespective of firm's borrowing, the operating risk still persists in the firm.
If the proportion of fixed cost is greater, then the operating leverage is higher. Operating
leverage increase risk because it makes return less predictable, over time (Schmedt, n.d.).
Khal et al. (2012) studied that high fixed cost firms have lower leverage ratios but also
much larger cash holdings than low fixed cost firms. It was also noticed that the market
values, marginal cash holdings of high fixed cost firms more than those of low fixed cost
firms. Houmes et al. (2012) expressed the importance of division of operating costs in
fixed and variable components. Researchers concluded that cost structure for operating
characteristics of many industries (in which firms were exogenously or technologically
constrained) require that firms make substantial investments in long-lived assets and
leaves managers with no discretionary power. Guthrie (2011) critically pointed out that
the relationship between operating leverage and the expected return is actually non-
monotonic when allowance is made for the option to abandon an unprofitable project: the
expected return is an increasing function of operating leverage when the latter is low, but a
decreasing function when it is high.
Need for the Research
Many papers were available in the area of financial leverage, but the research work in the
area of operational leverage was too scanty especially from Indian perspective. A study by
Chandrakumarmangalam and Govindasamy (2010) analysed the impact of leverage on
profitability of cement companies in India. However, there are no such studies found in the
area of paint industries. Researchers have made an attempt to address this lacuna in the
present paper. A rational investor would always prefer to analyse the financial position of
the company and make investments in a scientific way so as to avoid the risk of not getting
the expected return. This study would help such investors to evaluate the past performance
of the company over a period of ten years (2003-2010) till date if they prefer investing in
the paint industry in India.
Research Objectives
The basic objective of undertaking this study was to assess the impact of leverage on
profitability of selected companies in the sample. However, the specific objectives are
mentioned as under.
From table 1, it may be observed that mean DFL values of all sample paint companies
6 TIMS - QUEST
were around 1 suggesting that there exists financial leverage for all these companies. The
standard deviation values, between 0 to 1, indicate that DFL values did not deviate much
from the mean. Further, the skewness was positive for all the companies. Except the
Berger paints and AkzoNobel paints, the DFL values for the remaining companies were
highly skewed and kurtosis were leptokurtic i.e. more peaked than the normal curve. For
substantial analysis, one way ANOVA test was performed with the following hypothesis.
Ho1: There is no significant difference between the DFL positions of the paint companies.
Ha1: The DFL position of the paint companies differs significantly.
As per the ANOVA test results, DFL position of paint companies differed significantly
across the selected companies, F (4,45)=33.272, p=.000. Tukey HSD post-hoc
comparisons of the five companies indicated that the Shalimar paints (M = 1.73, SD=0.38,
p=.000) had higher mean DFL values than the other companies.
According to the literature, DFL influences EPS of the companies in a significant way. In
order to find the correlation between DFL and EPS, Pearson Product Moment Correlation
test was performed with the following hypothesis.
Ho2: There is no significant relationship between DFL and EPS of the paint companies.
Ha2: DFL and EPS of the paint companies are related.
Table 2: Pearson Correlation between DFL and EPS
Company ‘r’ value Correlation Significance Hypothesis
results value result
Asian paints -0.583 Negative 0.077 Not Rejected
Berger paints -0.032 Negative 0.930 Not Rejected
Nerolac -0.572 Negative 0.084 Not Rejected
Shalimar paints -0.435 Negative 0.209 Not Rejected
AkzoNobel paints -0.769 Negative 0.009 Rejected
As per table 2, there was a negative correlation between the said variables and the same
was statistically significant for all the companies (p>0.05) except AkzoNobel paints.
Operating Leverage
Table 3 : Operating Leverage of Selected Paint Companies
As per table 3, mean DOL values for the companies suggest that except Shalimar paints
Combined Leverage
Table 4 Combined Leverage of Selected Paint Companies
Asian Berger Nerolac Shalimar AkzoNobel
Particular paints paints paints paints
Mean 1.385 1.651 1.536 4.661 4.598
Standard Deviation 0.192 0.218 0.398 3.844 2.742
Skewness 0.126 1.356 0.790 2.470 0.562
Kurtosis -1.321 2.950 1.479 6.499 -0.524
As per table 4, DCL (a product of DFL and DOL) reflected that except for Shalimar and
AkzoNobel paints, the mean DCL values did not deviate much for the remaining ones.
DCL was positively skewed and was maximum in case of Shalimar paints. Again the
kurtosis value of Shalimar paints was greater than 3 suggesting more peaked than normal
curve (leptokurtic). Here also, One Way ANOVA test was performed to check whether
there was a significant difference in the DCL values among the selected companies.
Ho4: There is no significant difference between the DCL positions of the paint companies.
Ha4: The DCL position of the paint companies differs significantly.
As per ANOVA test results, DCL position of paint companies differed significantly across
the selected companies, F(4,45)=6.438, p=.000. Tukey HSD post-hoc comparisons of the
five companies indicated that the Shalimar paints (M = 4.66, SD=3.84), p<0.05) and
AkzoNobel paints (M = 4.60, SD=2.74, p<0.05) had higher mean DCL values than the
8 TIMS - QUEST
other companies. Further, the correlation between DCL and the EPS was examined with
the following hypothesis.
Ho5: There is no significant difference between DCL and EPS of the paint companies.
Ha5: DCL and EPS of the paint companies are related.
Table 5: Pearson Correlation between DCL and EPS
Company ‘r’ value Correlation Significance Hypothesis
results value result
Asian paints -0.753 Negative 0.012 Rejected
Berger paints 0.516 Positive 0.127 Not Rejected
Nerolac -0.669 Negative 0. 034 Rejected
Shalimar paints -0.570 Negative 0.085 Not Rejected
Akzo N obel paints -0.766 Negative 0.010 Rejected
As per table 5, the correlation between DCL and EPS was observed to be strong and
negative for all the companies with the exception of Berger paints. Except in the case of,
Berger and Shalimar paints, DCL and EPS were found to be statistically related for all
other companies (p<0.05).
Debt-Equity Ratio
Table 6 Debt-Equity Ratio of Selected Paint Companies
Particular Asian Berger Nerolac Shalimar AkzoNobel
paints paints paints paints
Mean 0.122 0.242 0.206 1.448 0.009
Standard Deviation 0.063 0.096 0.083 0.305 0.012
Skewness 0.324 -0.216 -0.173 0.200 1.009
Kurtosis -0.435 -0.727 -1.512 -1.203 -0.812
As per table 6, debt-equity ratio of selected companies suggest that the proportion of debt
was quite less as compared to equity in all the companies except for the Shalimar paints.
Still the Debt-Equity ratio of 1.448 for Shalimar paints was found to be within an
acceptable range. Here Asian paints, AkzoNobel paints and Shalimar paints were
positively skewed. Kurtosis value of all the companies were observed to be flatter than
normal value (platykurtic). The following hypothesis was set to check whether this ratio
differed among the selected companies.
Ho6: There is no significant difference between the Debt-Equity ratio of the paint
companies.
Ha6: The Debt-Equity ratio of the paint companies differs significantly.
As per table 7, the correlation between debt-equity ratio and the EPS was negative for all
the companies except Berger paints. The relationship was not statistically significant for
all the companies (p>0.05) except Asian paints.
EPS
Table 8 EPS of Selected Paint Companies
Asian Berger Nerolac Shalimar AkzoNobel
Particular
Paints paints paints paints
Mean 41.312 5.023 39.833 15.776 40.266
Standard Deviation 29.206 4.684 9.512 11.913 30.464
Skewness 0.922 1.863 0.780 0.639 1.181
Kurtosis -0.844 2.306 1.081 -1.208 1.011
As per table 8, mean EPS of Asian paints was observed to be maximum while the
minimum was in case of Berger paints. The higher standard deviation values suggest that
the EPS values deviated much from the mean values over a period of ten years. The EPS
values were positively skewed while the kurtosis value of Asian paints and Shalimar
10 TIMS - QUEST
paints were platykurtic. The result of One Way ANOVA test alongwith the hypothesis is
stated as below.
Ho8: There is no significant difference between the EPS of the paint companies.
Ha8: The EPS of the paint companies differs significantly.
As per ANOVA test results, EPS of paint companies differed significantly across the
selected companies, F (4,45)=7.026, p=.000. Tukey HSD post-hoc comparisons of the
five companies indicated that the Berger paints (M = 5.023, SD=4.68, p<0.05) and
Shalimar paints (M = 4.66, SD=3.84, p<0.05) had lower mean EPS than the other
companies.
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5. Chandrakumarmangalam,S. and Govindasamy,P. 2010. Leverage – “An Analysis
and its Impact on Profitability with Reference to Selected Cement Companies in
India”. European Journal of Economics, Finance and Administrative Sciences, 7.
Pp. 53-66.
6. Guthrie, G. 2011. “A Note on Operating Leverage and Expected Rates of Return”.
Finance Research Letters, 8(2), Pp. 88-100. June, Retrieved on April 10, 2013,
from http://ideas.repec.org/a/eee/finlet/v8y2011i2p88-100.html.
7. Houmes, R., MacArthur, J. B., and Stranahan, H.A. 2012. “The Operating Leverage
Impact on Systematic Risk Within A Context of Choice”, An Analysis of the US
Trucking Industry Managerial Finance, 28(12), Pp.1184-1202. Retrieved on April
12, 2013, from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2159959.
8. Kahi, M., Lunn, J., and Nilsson, M. 2012. “Operating Leverage and Corporate
Financial Policies”. Retrieved on April 15, 2013, from
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1787184.
9. Kumar, R., 2007. “Determinants of Firm's Financial Leverage”, A Critical Review.
Retrieved April, 17, 2013, from http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=1080883.
10. Negi, P., Sankpal, S., Mathur, G., and Vaswani, N., 2012. “Impact of Financial
Leverage on Payoffs to Stockholders and Market Value.”, The IUP Journal of
Accounting Research and Audit Practices, 11(1), January, 35-46. Retrieved on
A p r i l 1 8 , 2 0 1 3 , f r o m
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2146414.
11. Pachori,S. and Totala, N., 2012. “Influence of Financial Leverage on Shareholders
Return and Market Capitalisation”. A Study of Automotive Companies of
Pithampur (M.P.), India. Paper Presented at 2nd International Conferenceon
Humanities, Geography and Economics (ICHGE`2012)Singapore April 28-29,
2012. 23-26. Retrieved April 30, 2013 from
http://psrcentre.org/images/extraimages/412686.pdf.
12. Schmedt, F. (n.d.)., “The concept of operating leverage”, Retrieved on April 20,
2013, from http://www.noble.org/ag/economics/operatingleverage/.
13. Tulsian, P.C., 2009. “Financial Management. New Delhi”, Chand, S. and Company
Ltd.
Abstract
O
rganized Retail, one of India's upcoming
sectors, has presently emerged as the most
dynamic and fast paced industries of recent
times with several players entering the market. There
are many parties interested in an entities business as
REVIEW OF LITERATURE
Decadal review of literature is discussed as follows for the above said study:
Harcourt (1965) stated that the accountant's rate of return is 'extremely misleading'.
Solomon and Laya (1967) provided numerical examples to illustrate the disparity of accounting and
economic profitability.
Ijiri (1979, 1980) observed that under certain conditions the recovery rate converges to the “discounted
1. AT Kearney's 7th annual GRDI, in 2008. 2. FICCI Earnest & Young 3. Investment Commission of India 4. AT Kearney's
7th annual GRDI, in 2008. 5. bBooz & Co. (I) Pvt. Ltd. and Retail Association of India 6. Retail Association of India& Tata
Consultancy Services 7. http://www.maynardkeynes.org/maynard-keynes-economics.html, accessed on 10 / 07 /2013
16 TIMS - QUEST
cash flow rate” which is similar to economist's measure of the firm's profitability. The economist's
valuation is based on the future cash flows while in the profitability estimation only the historical data
are used.
Horrigan (1983) states that - “financial ratio research should be more interested in the role of the
financial ratios themselves than in the nature of the ratio components or to the ratios incidental role as
data size deflators”.
Bhaya (1990) studied the time series data from 1981-82to 1985-86 using three indicators (viz. money,
workforce & material) of efficiency published annually for the public and private sector by the survey
of industries and concluded that efficiency in public sector is at par with that of private sector.
Brief and Lawson (1991a, 1991b) derive a simplified error term for the IRR estimation. They cast
doubt especially on the accuracy of IRR estimation for a small number of observations using
simulation.
Jha (1992) studied Annual Survey of Industries data for the years 1960-61 to 1982-83 for cement,
cotton textiles, electricity, and iron & steel. All selected companies were found to be as efficient as
another.
Joshi and Little (1994) have attempted to estimate the rates of return to investment in the public and
private sectors.
Sharma (1995) have used Cobb- Douglas production function to study productive, which combines
both technical and allocate efficiencies for the cement industry in India.
Majumdar (1995) evaluated relative performance difference between the public sector, joint sector and
private sectors of Indian industry.
Shine and Soemen (1998) studied large sample of listed US companies for the year 1975 – 1994 found
that there is an inverse relation between the cash conversion cycle and corporate profitability.
Kaur (1998) compared TFPI of 15 public as well as 15 private sector firms from different sectors
(aluminum, steel, fertilizers, engineering, drugs and chemicals and consumer durables).
Saravanan (2001) made a study on working capital management in ten selected non-banking financial
companies by different statistical tools on different ratio to examine the effective management of
working capital.
Mansur Mulla (2002) used Z score model with five weighted financial ratios to study for the financial
health of textile mill.
Vijayakumar and Venkatachalan (2003) in their study stated that keeping more current assets and
variations in size of working capital cause a reduction in profitability.
Naib (2003) compared financial efficiency of 26 enterprises (13 public sector and 13 private sector) for
a 12 year period from 1988-89 to 1999- 2000. All selected firms returned modest positive average
annual growth rate during the selected period.
Selvam, M.V. (2004) had analyzed Indian Cement industry's financial health using Z scores.
K (2004) stated that accounting ratios are still dominant factors for analyzing associated credit risk of
firm.
Eljelly (2004) stated that efficient liquidity management involves planning and controlling of current
assets and current liabilities, hence to eliminate the risk of inability to meet short-term obligations as
well as avoids excessive investment in assets. Moreover it was stated that cash conversion cycle was of
more importance as a measure of liquidity than the current ratio that affects profitability.
RESEARCH METHODOLOGY
Objectives
To analyze the profitability ratios of the Indian organized retailing companies.
Sources of Data
Study is based on secondary data. To analyze the trend and growth of value addition in terms of EVA in
selected retailing organizations required financial data were collected from respective companies
website, annual reports, audited balance sheet, profit & loss account, research and analysis conducted
by various sites active in equity trading viz. moneycontrol.com, icicidirect.com, indiainfoline.com,
karvy.com and motilaloswal.com.
Sample Design
The sample size of present study is top 10 organized retailing companies of India with respect to market
capitalization. These companies were selected as sample companies by considering the availability of
financial data for computing EVA, components of EVA (NOPAT, WACC), for the study period from
2007-2008 to 2011-2012. The sampled companies for the study are as under:
Sr. Market Capitalization
Company Name (Rs . Cr.)*
No.
1 Trent 3,3339.77
2 Shoppers Stop 3,051.06
3 Future Retail 2,803.31
4 Kewal Kiran 985.94
5 Prozone Capital 366.25
6 Provogue 97.20
7 Cantabil 27.76
8 Rei Six Ten 22.95
9 Kootons 14.33
10 Brandhouse Retails 11.58
* As on 15 June 2013
18 TIMS - QUEST
Tools selected for measuring profitability
Below mention tools will be used to calculate selected company's profitability individually and will be
compared with other companies.
It is also known as return on equity (ROE) and reflects profit generated by shareholders investment
over a period of time. It is calculated as:
Return on capital employed is also known as Return on investment. It is ratio of the average amount of
capital employed and an average of accounting earnings from the different portfolios. Generally, it is
known about the rate of return on investment. It can be calculated from below mentioned formula.
Earnings per share are widely used method of measuring profitability of the common shareholders'
investment. It measures the profit available to the equity shareholders on per share basis. The trend
analysis of EPS shows whether or not the firms earning power on per share basis has changed over that
period.EPS does not reflect the amount paid as dividend and amount retained in business. It can be
calculated from below mentioned formula.
Earnings per Share = (Net profit after tax − Preference dividend) / No. of equity shares
It is also known as price to book (P/B) ratio.Book value is calculated from the firm's historical cost or
accounting value while market value / market price is determined in the stock market (phenomenon of
demand and supply) through its market capitalization. A lower P/B ratio could mean that the stock is
undervalued or something is fundamentally wrong with the company. It can be calculated as:
From the five years available balance sheets and profit & loss account following ratios viz. net worth
ratio, return of capital employed, EPS and market to book value ratio, were computed and average
returns over five years were compared.
From table 1.1 it can be observed that average net worth ratio is highest of Rei Six Ten (24.91%)
followed by Cantabil (21.96%) and Kewal Kiran (17.89%). Hence it indicates that Rei Six Ten has
highest profitability with respect to net worth ratio among the selected organized retail companies.
Further due to increase in price of raw material and other variable overheads external borrowings
increased by which operating profit nosedived and loss were incurred as per profit and loss account of
company hence return on net worth nosedived from 16.29 % to -166.90 %.
20 TIMS - QUEST
From table 1.2 it can be observed that average return on capital employed ratio is highest of Rei Six Ten
(35.45%) followed by Shoppers Stop (30.56%) and Kewal Kiran (25.84%). Hence it indicates that Rei
Six Ten has highest profitability with respect to return on capital employed among the selected
organized retail companies.
From table 1.3 it can be observed that average EPS is highest of Kewal Kiran (Rs. 26.99) followed by
Trent (Rs. 17.68) and Future Retail (Rs. 7.16). Hence it indicates that Kewal Kiranhas highest
profitability with respect to EPS among the selected organized retail companies.
Table 1.4 Markets to Book Value Ratio of Indian Organized Retailing Companies
(2007 -08 - to 2011 – 12) (Ratio in Percentage )
Company 2007 -08 2008 -09 2009 -10 2010 -11 2011 -12 Average
Trent 1.68 0.94 2.63 1.75 1.88 1.78
Shoppers Stop 2.42 0.76 2.41 4.68 4.88 3.03
Future Retail 5.45 1.38 3.43 2.15 1.16 2.71
Kewal Kiran 2.72 0.81 1.72 3.13 3.51 2.38
Prozone
Capital 0.00 0.00 0.00 0.00 0.92 0.18
Provogue 1.27 0.57 0.78 0.67 0.25 0.71
Cantabil 0.00 3.44 1.10 0.20 0.26 1.00
Rei Six Ten 11.25 3.98 7.83 1.44 0.25 4.95
Kootons 3.93 2.48 0.21 0.21 0.33 1.43
Brandhouse
Retails 0.18 1.58 1.03 0.45 0.14 0.68
CONCLUSION:
REFRENCES :
1. Brief, R.P. and Lawson, R.A. 1991. “Approximate error in using accounting rates of return to
estimate economic returns”, Journal of Business Finance and Accounting 18 (1).Pp. 13-20.
2. Brief, R.P. and Lawson, R.A. 1991. “Approximate error in using accounting rates of return to
estimate economic returns: A correction”, Journal of Business Finance and Accounting
18.Pp. 915-916. November.
3. Bhaya, H. 1990. “Management Efficiency in the Private and Public Sectors in India” in
Economic and Political Weekly, XXXVIII (29)Pp. 3088-3093.
5. Harcourt, G.C. 1965. “The accountant in a golden age”, Oxford Economic Papers New Series
,17(1).Pp. 66-80.
22 TIMS - QUEST
6. Heath, J. (ed.), 'Public Enterprise at the Crossroads', London: Routledge.
8. Ijiri, Y. 1979. “Convergence of cash recovery rate”, in: Quantitative Planning and
Controlling. Essays in Honor of William Wager Cooper on the Occasion of His 65th
Birthday (ed. Ijiri,Y. and Whinston A.B.), Academic Press, New York.
9. Ijiri, Y. 1980. “Recovery rate and cash flow accounting”, Financial Executive Pp.
54-60.
10. Jha, R. and Sahni B.S.1992. “Measures of Efficiency in Private and Public Sector
Industries: The Case of India”, Annals of Public and Cooperative Economics,
63(3).Pp.489-495.
11. Joshi, V. & Little I.M.D. 1994. India – Macroeconomics and Political
Economy,Pp. 1964 – 1991. New Delhi: Oxford University Press.
15. Majumdar, S.K. 1995. “Public, Joint and Private Sectors in Indian Industry –
Evaluating Relative Performance Differences”, Economic and Political Weekly,
XXX 7(8). Pp.25-32.
16. Mulla M. 2002. “Use of Z Score Analysis for Evaluation of Financial Health of
Textile Mills-A Case Study”, Abhigyan, Vol.Xix, No.4, Pp37-41.
17. Naib, S. 2003. “Partial Divestiture and Performance of Indian Public Sector
Enterprise, Relative Performance Differences”, Economic and Political Weekly,
XXX 7(8) Pp.25-32.
22. Shine and Soemen ,1998.“Efficiency of Working Capital and Corporate Profitability” Finance
India, 8(2) Pp.37-45.
23. Solomon, E. and Laya, J.C. 1967. “Measurement of company profitability some systematic
errors in the accounting rate of return in Financial Research and Management Decisions” (ed.
Robichek ,A.A. and Willy).
24. V, K. C. 2005. “Measuring Financial Distress of IDBI Using Altman Z –Score Model”,The
Icfai Journal of Bank Management,Vol. 3,Pp. 7-17.August.
26. Weston, J.F. and Brighom, E.F. “Managerial Finance” cited in Sharma, A.“Profitability
analysis of Drugs and pharmaceutical companies in India” A thesis submitted for the degree
of PH.D, in the faculty of commerce, Saurashtra university Rajkot 1992.
24 TIMS - QUEST
OCTAPACE the work values and Psychological Contract :
An Investigation in a Hotel Business
Abstract
W
ork values and beliefs systems are
playing an increasingly influential role in
shaping the attitudes and behaviour of
individuals and organizations towards the
employment relationship. This paper explores the
impact organizational work values (Openness,
Autonomy, does on psychological contract with their
Anitha Thomas employees. Numerous studies exist indicating that
the psychological contract is an important antecedent
Assistant Professor,
of work-related attitudes and behaviours. When
Faculty- School of Business and Law organization work setting is examined, it is important
Navrachana University to understand how psychological contract gets
Vadodara affected because of organizational work values
E-mail : anitha_tom@rediffmail.com which in return define the attitudes and behaviour.
This study attempts to extent the psychological
contract research field by focusing on two
antecedents (work values and contract) for which the
& study propose a relationship exists with the content of
each employees' psychological contract relating to
work values. Defining the psychological contract as
Prof. Avijan Dutta
subjective, promise-based beliefs about employer
Assistant Professor, and employee obligations, we argue that individual
HOD- Department of Management Studies dispositions namely their age, year of experience etc,
National Institute of Technology ( NIT) influence these beliefs. All 70 employees employed
West Bengal - India in a renowned hotel was studied using 40 item
E-mail : avijan.dutta@dms.nitdgp.ac.in OCTAPACE inventory for Organizational work
values developed by Udai Pareek and 23 PCI items
developed by Donald Cable. While investigating
individual work values it were found openness,
confrontation, collaboration and trust showing high
significance with Psychological contract and least
with Authenticity and Autonomy.
26 TIMS - QUEST
and commitment. It needs to be understood that employees and organizations have reciprocal
obligations and mutual commitments, both stated and implied that define their relationships. The
commitment may be in formal, psychological or social terms. The employees wish to know what they
are supposed to do for the organization and the support they will get in performing their jobs. Their
performance appraisal and reward systems need to be linked to the new initiative. They should derive
personal satisfaction and social recognition from the new initiative. Most of all, they should believe
that the top management sincere and practices what it preaches. The features that shape these contracts
include voluntary choice, belief in mutual agreement, multiple contract makers, managing losses when
contracts fail, and the contract as a model of the employment relationship (Rousseau, 2004).
More importantly, the fulfillment and breach of the contract has been linked to meaningful
organizational outcomes (Bocchino, Hartman & Foley, 2003; Johnson & O-Leary-Kelly, 2003;
Kickul, Lester, & Belgio, 2004; Robinson, 1996; Turnley, Boling, & Bloodgood, 2004). Empirical
findings (Johnson & O-Leary-Kelly, 2003; Robinson, 1996) have indicated that a psychological
contract fulfillment is related to higher levels of key work-related attitudes (e.g., organizational
commitment, job satisfaction, trust, loyalty) and objective measures (e.g., job performance) and the
breach has been found to have a relationship with lowered organizational citizenship behavior (Hui,
Lee, & Rousseau, 2004; Robinson, Kraatz, & Rousseau, 1994; Robinson & Morrison, 1995; Robinson
& Rousseau, 1994). Its efficiency and effectiveness in an organization has been acknowledged by past
research (Podsakoff, MacKenzie, Moorman, & Fetter, 1990; VanDyne, Graham, & Dienesch.
An emerging stream of research suggests that organizational culture has a greater impact on the
relationship between psychological contracts and organizational outcomes such as organizational
citizenship behavior and organizational effectiveness. Organizational culture has been identified as an
important variable that influences such relationships. As De Witte and Van Muijen (1999) found,
“organizational culture is incorporated in people's psychological contracts… people are attracted to a
certain type of organizational culture because it provides them with guidance and security” (p.585). In
other words, certain types of organizational culture influence the type of psychological contract an
employee forms with their employer. For example, if an organizational culture provides an employee
with guidance and security this influences the psychological nature that the employee will form with
their employer. Hence, when an employee is provided with guidance and security they will make
assessments about what the organization's commitments and obligations are to them. These
assessments provide the foundations for creating psychological contracts. Therefore, the question of
whether organizational culture influences psychological contract is of interest because it may moderate
this relationship.
28 TIMS - QUEST
of psychological and implied contracts are described along with their organizational implications.
Subjectivity is inherent in all contracts. Rousseau (1995) in her study stated that there would be
different contract at different organization setting and culture. Thus the underline aspect is
psychological contract type is highly dependent on organization culture elements.
Characteristics of Different Contracts
Transactional Relational
Little organizational loyal High organizational loyalty
Employees develop marketable skills Employees develop company-specific-skills
Unstable employment Stable employment
Flexibility/easy exit Willing to commit to one company
Less willing to take additional responsibilities High intent to stay with organization
Reward system focuses on short term Members highly socialized
Source: Rousseau, 1995.
Area of Study: Hotel
Hotel Industry in India has witnessed tremendous boom in recent years. Contribution of hotel industry
to GDP is 18.5 percentages. Average growth of 8.5% over the next 10 years in this sector is indicated.
Problem Statement
Accordingly, this study explores the relationship between types of OCTAPACE (eight values of
organization culture) and psychological contract. It also addresses the influence of perceptions of these
eight values of organizational culture on this relationship. To address the problem this study looks at
the psychological contracts, perceptions of organizational culture, and inclination to create
effectiveness among employees in a Hotel.
Research Objective
The objective as noted, the specific factors to be evaluated include (a) perceptions of organizational
culture and its eight values in a hotel and b) types of psychological contract prevailing in the joint due to
these values. The following research questions are posed:
1. Which work value is most effective among employees?
2. Does the work value and psychological contract differ among age, experience and marital status in
organization?
3. How do work values relate to an employee's propensity to perform in the organization?
In order to evaluate the research hypotheses, a survey was used to measure (a) psychological contracts,
(b) organizational culture work values among the employees of a Hotel business. The demographics of
the respondents reviewed in order to identify response trends were based on (a) age (b) experience and
(c) year of experience in current employment.
Measures
To investigate the OCTAPACE profile and Psychological contract in a Hotel, the instrument designed
by Prof. Udai Pareek on OCTAPACE containing 40 and 23 item from Donald Cable ( Appendix 1) was
administered. On the basis of purospsive sampling total 70 sample data was collected and questioners
were analyzed using SPSS software
Results
The study presents the analysis of the research study conducted to investigate the relationship between
the link, fit, and influence of organizational culture on psychological contracts, seeking to identify the
strongest indicator(s) of which work value plays a greater role in the Hotel. This provides the results for
the three research questions posed. To begin, descriptive statistics for the variables in the study are
presented. Following thereafter, the research questions are investigated using a t-test, ANOVAs,
correlations, and regression analysis. The Statistical Package for Social Sciences (SPSS) version 13.0
was used in this study. The following sections present the findings accordingly
Research Findings
Table 1 :
DescriptiveStatistics
N Minimum Maximum Mean Std. Dev
Openness 70 1.2 3.8 2.81 0.55
Confrontation 70 1.6 3.8 2.79 0.40
Trust 70 1.8 3.8 2.71 0.51
authenticity 70 1.6 3.4 2.38 0.50
proaction 70 1.6 3.6 2.84 0.59
Autonomy 70 1.8 3.6 2.86 0.47
Collaboration 70 1.8 3.4 2.66 0.45
Experimenting 70 1.6 3.2 2.59 0.44
Psychological Contract 70 2.5 4.8 3.19 0.45
30 TIMS - QUEST
The reliability conducted Corbach Alpha method revealed .716 which is the generally accepted
standard (Nunnally & Bernstein, 1994). The mean scores of psychological contracts (M = 3.19, SD =
.45) been the higher in all depicts that the sample had a significant opinion that work values has a link
with Psychological contract and authenticity mean (M = 2.38, SD = .50) been the lowest indicate that
authenticity being the value underlying trust is in question. And further study revealed that among new
entrants authenticity and trust value is very low. It was felt that trust among employees is not extended
to delegating work and responsibility among them.
Research Question 1: Which work value is most effective among employees?
Table 2 : Correlation Significance between OCTAPACE and Psychological Contract
Sum of Mean
Squares df Square F Sig.
Sum of Mean
df
Squares Square F Sig.
1 Regression 11.072 8 .179 0.43 .003
Residual 2.919 62 .417
Total 13.991 70
This table summarizes the results of an analysis of variance. The sum of squares, degrees of freedom,
and mean square are displayed for two sources of variation, regression and residual. The significance
value of F is .003 it means the independent variables OCTAPACE do explain the variation in the
dependent variable and it signifies that Work values do moderate Psychological Contract. While
investigating individual work values Table no. 4 also suggest that openness, confrontation,
collaboration and trust showing high significance with Psychological contract and least with
Authenticity and Autonomy.
Table 4 : ANOVA TEST
Unstandardized Standardized
Model
Coefficients Coefficients t Sig.
32 TIMS - QUEST
Q-3) Does the work value and psychological contract differ among age, experience and marital
status in organization?
Table 5 : Co- relational studies between Psychological Contract and Employee Profile
Significant findings both positive and negative were observed across age, experience and year of
experience at current employment with regards to the work values and psychological Contract. Table 5
indicates positive significance very much vital at Openness with Confrontation; Openness with
Collaboration and Authenticity and trust, wherein negative significance in Autonomy and
Experimenting.
Conclusion :
The study overall indicating that perceived organizational support and psychological contract
fulfillment are important factors that shape the quality of work values. The significance value of F 0.43
is .003 it means the independent variables OCTAPACE do explain the variation in the dependent
variable and it signifies that Work values do moderate Psychological Contract. The study indicates
strong individual work value: Openness, Confrontation, Collaboration, and Trust having good norms
of the value in the Hotel, and Inspite of strong work values, study also marks poor work values
prevailing in the organization. The areas are Authenticity, Autonomy Proaction and Experimenting.
The observations were in line to the findings they employees are not given enough freedom to work,
things are more tailor made. That's the reason scope for experimenting new and breaking the traditional
format is somewhat difficult in any hotel setting. Even the moderating variables of age, experience and
year of experience indicating positive significance at Openness with Confrontation; Openness with
Collaboration and Authenticity and trust, wherein negative significance in Autonomy and
Experimenting.
It facilitates the creation of 'workable arrangements' of mutual benefit to the employee involved. It
leads to a trust which has been established through the psychological contract, and this makes both
parties to exhibit openness and honesty.
34 TIMS - QUEST
13. Kickul, J., Lester, S.W., Belgio, E.E., 2004."Attitudinal and Behavioral Outcomes of
Psychological Contract Breach", International Journal of Cross Cultural Management,
4(2). Pp. 229-252.
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Wake-Up Call: Your Workforce is Changing, Are You John Wiley & Sons.”
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Kramer & T. R. Tyler (Eds.), “Trust in Organizations: Frontiers of Theory and Research” Pp.
261-287. Thousand Oaks, CA: Sage.
16. Mohr, Jakki, J., Robert, J., Fisher and John, R., Nevin, 1996. “Coollaborative coummication
in Interfirm Relationships: Moderating Effects in Integration and Control”, Journal of
Marketing, 60 (3). Pp. 103-15.
17. Morgan, R. M. and Hunt, S. D. 1994. “The commitment-trust theory of relationship
marketing.” Journal of Marketing, 58(3), 20-38.(Xenikou et all: 1996)
18. Nunnally, J. C. & Bernstein, I. H. 1994. “Psychometric theory”(3rd ed.).(New York:
McGraw-Hill, Payne, R., 1991. “Taking stock of Corporate Culture Personnel
Management” , Pp.26-29.
19. Podsakoff, P.M., MacKenzie, Moorman, S.B. & Fetter, R.G., 1990. “Transformational
leader behaviours and their effect on follower's trust in leader, satisfaction, and
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exception but the Norms”, Journal of Organizational Behaviour ,15. Pp. 245-259.
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Science Quarterly”, 41. Pp. 574-599.
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Psychological Contract: A Longitudinal Study", Academy of Management Journal, Vol.37.
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The Effect of Unfilled Obligations on Civic Virtue Behavior", Journal of Organizational
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of Management Inquiry, Vol.12(3). Pp. 229-238.
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26. Turnley, W. H., Bolino, M.C., Lester, S.W. and Bloodgood, J.M. 2004. "The Effects of
Psychological Contract Breach on Union Commitment." Journal of Occupational and
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28. Van Dyne, L., Graham, J.W. & Dienesch, R.M. 1994. “Organizational Citizenship
behaviour: Construct redefinition, measurement and validation”, Academy of Management
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Abstract
38 TIMS - QUEST
frame, only 4 companies approached Credit Rating Agencies(CRAs) for grading. These 4 companies
also did not accept the grade assigned to them. This situation aroused because there were no incentive
for companies to opt for rating/grading. On the one hand a fundamentally good company had an
apprehension, that if they do not get a good rating, their plan to raise money may jeopardize on the other
hand fundamentally not so good companies had fear that, their careful cover ups may get
exposed(Poudyal,2008).
According to SEBI guidelines, Credit Rating Agencies (CRAs)are supposed to analyse companies, for
the purpose of grading on the following parameters:
a. Business Prospects and Competitive Position
i. Industry Prospects
ii. Company Prospects
b. Financial Position
c. Management Quality
The distribution of 167 companies, that offered IPO between 2007 and 2013 are as follows:
Literature Review:
There is significant amount of literature available in this domain. Prior research shows that there is no
statistically significant differences between firms who go public during a recession and those who wait
for markets to improve(Blum,2011).
The Initial Public Offering(IPO) is considered to be one of the most significant events in the life cycle
of a company (Celikyurt, Selvilir, and Shivdasani, 2010; Latham and Braun, 2010). An IPO is the first
sale of stock by a private company to the public and the consequential listing on a stock exchange.
Going public allows firms to raise and access funds necessary to accelerate growth in order to achieve
market leadership (Ernst and Young, 2010).
The IPO market serves as an economic indicator in both practice and academia due to its proven pro-
cyclical nature (Lowry, 2003). During an economic expansion, IPOs experience a ―boom market;
characterized by an increased number of firms tapping primary market to raise resources , while ―bear
marketsǁ, occurring during a recession, exhibit low levels of IPO activity(Blum,2011). Lowry (2003)
and He (2007) recognize that variation in IPO volume cannot fully be explained by financing
requirements and identify the economically significant factors contributing to aggregate IPO
fluctuations. Bugstallen (2008) suggest that firms issue equity following period of high stock market
valuations to benefit from the accompanying low cost of equity, at that phase.
40 TIMS - QUEST
Brau and Fawcett (2004) in a survey of 336 CFOs(Chief Financial Officer's) found that, while
considering IPO, timing of the issue is in top of their mind. Rosen, Smart and Zutter (2005) found that
firm quality does not differ significantly among firms, that access primary market at the boom or bust
time. The current study studies Indian equity market in this context, over the period of 2007 to 2013.
Research Methodology :
In this paper it is explored whether market condition in terms of prior 3 months return(compounded
annual growth rate or CAGR) and average Price to Earning(PE) ratio of Bombay Stock Exchange's
(BSE) top 30 share “sensitive index” or sensex differ significantly for IPOs of different fundamentals,
namely above average, average and below average.
Secondary data from Capital Market database is being used, the software package being used is SPSS
16.
To remove the outliers, any value outside 3-standard deviation from the mean, for both 3 months
CAGR and 3 months average PE is removed. This way 2 values for 3 months average return and 1 value
for 3 months average PE is removed.
The data is tested for normal distribution, and found that data are not normally distributed. So non-
parametric statistics is used for analysis.
Three_Months_Avg_Return
Casewise Diagnostics a
Case Three_Months_Avg_
Number Std. Residual Return Predicted Value Residual
Casewise Diagnostics a
Case
Number Std. Residual Three_Months_Avg_PE Predicted Value Residual
Three_Months_Avg_Return
42 TIMS - QUEST
Kruskal-Wallis Test
Ranks
Funda
mental N Mean Rank
Avg_3_Months_Return_of_ 1 71 70.08
Sensex 2 60 61.17
Total 131
Avg_3_Months_PE_of_ 1 71 65.75
Sensex 2 60 66.30
Total 131
Avg_3_Months_Return_of_ 1 71 82.80
Sensex 2 60 72.62
3 33 99.80
Total 164
Avg_3_Months_PE_of_Sensex 1 71 81.30
2 60 82.12
3 33 85.79
Total 164
However, with a p value of 0.901( which is significantly higher than 0.05), the same cannot be said
about prior 3 months average PE value of sensex. As a result Null Hypothesis is accepted.
Conclusion :
In this study we found no significant difference in market condition based on two parameters, e.g.
Average PE(of 3 months) and Average Return(average of 3 months), for the time frame when
companies with different fundamental quality get listed. We analyzed 167 companies, which are
graded by different credit rating agencies, over a 6 year(2007-2013) time period.
One of the limitations of the study is, we analyzed data only for 6 years period. We also considered only
two parameters as a proxy for market condition, other factors like broad money supply(M3), Gross
Domestic Product (GDP) growth rate etc. also can be considered for analysis in some future studies.
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Vol. IV, Issue I, DECEMBER, 2013 47