CEO’s Reputation : Corporate Performance Farzaneh Nassirzadeh, Mohammad Javad Saei, Mahdi Salehi and Farhad Rana Varnosfaderani Family Conflict Resolution : Purchase role of Urban Women Anilkumar and Jelsey Josph Non - performing Assests : PSB Dr. R. Velmurugan Vegetable Price Rise : Rythu Model Solution Prof. Subhendu Dey and Dr. Salma Ahmed Organizational Flexibility Real Option Approach Prof. Pankaj M. Madhani Random Walk Behaviour : Indian Equity Market P.K. Mishra Management Accounting Benefits : ERP Environment Mahesha V. and Akash S.B. Household Income : Potential Entrepreneur Purna Prabhakar Nandamuri and C.H.Gowthami Enhancing Organizational Performance : Indian IT Sector Iliyas Mohammed Stress Symptoms : Structural Equation Modelling G.S. David Sam Jayakumar and A. Sulthan SCMS COCHIN SCHOOL OF BUSINESS, INDIA
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ISSN-0973-3167
CEO’s Reputation : Corporate PerformanceFarzaneh Nassirzadeh, Mohammad Javad Saei ,
Mahdi Salehi and Farhad Rana Varnosfaderani
Family Conflict Resolution : Purchase role of Urban WomenAnilkumar and Jelsey Josph
Non - performing Assests : PSBDr. R. Velmurugan
Vegetable Price Rise : Rythu Model Solution Prof. Subhendu Dey and Dr. Salma Ahmed
Organizational Flexibility Real Option ApproachProf. Pankaj M. Madhani
Random Walk Behaviour : Indian Equity MarketP.K. Mishra
Management Accounting Benefits : ERP EnvironmentMahesha V. and Akash S.B.
Household Income : Potential EntrepreneurPurna Prabhakar Nandamuri and C.H.Gowthami
Enhancing Organizational Performance : Indian IT Sector Iliyas Mohammed
Stress Symptoms : Structural Equation ModellingG.S. David Sam Jayakumar and A. Sulthan
Farzaneh Nassirzadeh, Department of Accounting, FerdowsiUniversity of Mashhad, Mashhad, Iran.
Mohammad Javad Saei, Department of Accounting, FerdowsiUniversity of Mashhad, Mashhad, Iran.
Mahdi Salehi Department of Accounting, Ferdowsi Universityof Mashhad, Mashhad, Iran.
Farhad Rana Varnosfaderani , Ferdowsi University ofMashhad, Iran.
hen managers announce news concerning
earnings reduction or loss, they face to significant
costs which affect on managers’, companies’ and
stakeholders’ interests. For instance, such news may decreasecompensation for managers (Matsunaga and Park, 2001),lower their job security (Puffer and Weintrop, 1991) anddecrease stock prices (Skinner and Sloan, 2002). It seemsthat managers who are aware of such negative outcomes, tryto provide explanations and attribute earning reduction orloss to external factors and uncontrollable events in order topretend that they are not responsible for poor performance(Kaplan et al, 1990; Morgenson, 2004). This is based onattribution theory in psychology. This theory was foundedby Heider (1958).
Researches indicate that these explanations and theirplausibility are of high importance and useful for financialanalyzers and investors and they use them in financial
W
The present study aims to investigate the relationship between CEO’s pre-existing reputation and his justifications for poor performance
with investors’ judgment about future performance, and CEO’s current reputation in Iran. Using a questionnaire among non-professional
investors in Tehran Stock Exchange, data were collected and analyzed by Spearman and Man Whitney tests. The results indicate that
from students’ viewpoints, there is a negative relationship between CEO’s pre-existing reputation and justifications for poor performance.
The only difference between students’ and investors’ viewpoints is that from investors’ viewpoint there is no relationship between CEO’s
explanations for poor performance and poor performance persistence. So far, only very few studies have been conducted on the subject
of this study. On the other hand, difference between cultures may cause different findings. The current research is the first study in Iran.
Abstract
SCMS Journal o f Indian Management , July - September, 2013 6
A Quarterly Journal
analyses and estimations of company future (Clarkson et al,
1999; Rogers and Grant, 1997).
Many researches were conducted on managers’ incentives for
providing explanations about poor performance however
researches conducted about investors response(market
participants) to these explanations are few.(Cianci and
Kaplan, 2010; Barton and Mercer, 2005). In this research,
investors’ response to CEO explanations and CEO himself
are considered as an explanation resource.
Theoretical issues
As noted before, CEO explanations can be traced back to
attribution theory in psychology founded by Heider in 1985.
Attribution is a process used by people to link events
(behaviours) to the factors created by them (Heider, 1985).
Financial events can be attributed to fundamental factors
providing them or in other words, financial events can also be
attributed. In some accounting researches, for convenience
the term explanation is used instead of attribution.
Social psychologists don’t agree unanimously about
attribution theory and have analyzed it from different
perspectives and suggested different theories. Some of the
important attribution theories are: 1. attribution theory of
Heider’s simple psychology 2. Attribution theory of Davis
and Jones’ Correspondent inference theory 3.Harold Kelley
Covariation theory and 4. Bernard Weiner three dimensional
classification.
One of the most important findings in attribution theory is
that mistakes or biases cause attribution distortions. For
example, evidences indicate that when one judges about others
behaviour he is inclined to over evaluate internal factors effect
and under evaluate external factors effect; these biases are
called fundamental attribution error (Karimi, 1994; Ross,
1997). For example, manager is inclined to attribute poor
performance of sales agency to personal laziness to link to
innovation in competitors’ products. Explanation provided
for this inclination is that one is aware of his situational factors
more than others’ so he attributes his behaviour to situational
factors and others behaviour to their character factors (Karimi,
1994). People and organizations also want to attribute their
success to internal factors such as ability or effort while
external factors such as bad luck are accounted for failure.
This bias is called self-serving bias (Goerke et al 2004; Johns,
1999). In other words, in self-serving bias, one increase his
self confidence by enlarging their share in positive events
such as good financial performance and minimize his share in
negative behaviours such as failure in running company by
reproaching others or attribute it to situational factors to
preserve himself confidence (Karimi, 1994). In companies,
managers provide explanations or attributions for corporate
performance (Saatchi, 1993) or their predictions. They use
self-serving bias to preserve job security as well as their
reputation. For example, when former CEO of Ken Lay
Company underwent a trial for fraud, he accused former
financial manager, Andrew Fastow, as guilty.
The way people interpret events around them affects on their
behavior significantly. People try to perceive behaviour
(event) reasons to take advantage from prediction ability and
control future behaviours (events). In evaluation of corporate
performance, investors should determine behaviour (event)
reasons and responsible resource to use it in their decision
making. These decisions are about both current situation
of company and evaluation of future performance. Managers
are responsible for directing company and they use attribution
or explanations in all aspects of their work. Explanations
provided by managers can affect on investors decisions and
any information effective on investors’ judgment and decisions
is of high importance in accounting. In accounting theory,
decision making plays a pivotal role and the topic of decision
making is emphasized frequently in definition of accounting.
So, it is very important to study how users of financial and
non-financial information make decisions. It can lead to infer
and detect important information for them (Hendriksen and
Breda, 1991).
The present paper is classified as behavioural research. The
main question in behavioural research is ‘’how people really
use accounting information (financial and non-financial) and
other information and process them.’’ Behavioural researches
are of high importance because first other research areas
(capital market, agency theory etc.) don’t address this
question. Secondly, behavioural researches on accounting can
provide a valuable insight about how decision makers response
to particular items of information (Godfrey, 2003).
Research background
Researches indicate that managers are inclined to attribute
poor financial performance to temporary external factors or
provide explanations by self-serving bias. They also want to
SCMS Journal o f Indian Management , July - September, 2013 7
A Quarterly Journal
attribute good performance to internal factors. This inclination
was observed both in annual reports (Bettman and Weitz,
1983) and seasonal profit predictions (Baginski et al. 2004,
2000).Baginski et al (2004) found that when managers predict
low profit or loss for the company, they are more inclined to
provide explanations. They obtain credit of good results by
providing these explanations and attribute reproach for bad
results to other factors. So, both investors’ idea about
managers’ ability to provide positive returns is improved and
when board of directors believe that manager is responsible
for good performance but not poor performance, his rights
and job security are improved. Thus, managers are inclined to
provide self-serving disclosures and attributions to attribute
good financial performance to sustainable internal factors and
poor financial performance to temporary external factors
(Aerts, 2005).
Researches indicate that when a company faces poor financial
performance, CEO explanations on poor financial performance
may affect on financial analyzers’ judgment about future
performance of company. In other words, when explanations
provided by CEO are plausible, investors and financial
analyzers’ belief in future performance of company is in higher
level compared with when explanations are implausible. It
means they believe that poor financial performance in past
years is less likely to be continued in next year (Barton and
Merser, 2005; Cianci and Kaplan, 2010). Hirst et al (1995)
study indicates that judgment about future performance is
formed given to plausibi l i ty of explanations about
performance.
Baginski et al (2011) performed a research in which the effect
of explanations on earning revision predicted by analyzers
was studied. They found that there is a relationship between
explanations and revision in earning forecast by financial
analyzers. Their research also indicated that when an
explanation is provided for earning predicted by manager,
analyzers revise their predictions of ESP and predict it as
ascending. Researches indicate that if plausible explanations
are provided by manager, there is significant difference
between estimation of ESP and stock prices by investors and
analyzers in comparison with when explanations are
implausible (Barton and Merse, 2005; Cianci and Kaplan,
2010).
Managers may provide explanations for future performance
voluntarily (for example manager may provide explanations
to predict future earning). They try to increase their
predictions credit or accuracy before investors and analyzers
(Baginski et al, 2000). In addition, more disclosures lead to
reduced capital cost of company (Sengupta, 1998; Botosan,
1997). By reduced capital cost, investors are more inclined to
invest on the company indicating stock attractiveness.
Providing explanations about company performance can affect
on capital cost because it gives more information about the
company. Barton and Merser research (2005) also indicates
negative effect of implausible explanations on capital cost. In
addition, improved judgments about future performance lead
to increased stock attractiveness (Cianci and Kaplan, 2010).
Francis et al (2008) found that there is a negative relationship
between CEO reputation and earning quality, implying that
the more reputable the CEO, the lower earning quality will
be. This finding is consistent with Mlmendier and Tate (2009)
study. Their study indicates that reputation is of negative
outcomes too. They found that company performance declines
compared to past year after manager becomes reputable. In
addition, these reputable managers most likely perform
earnings management in the next year to reach expected
performance and obtain higher compensation. However, Kevin
Koh (2011) findings indicate that managers are more
conservative and their willingness for earnings management is
lower after becoming reputable so that financial reporting
quality increases.
The results of Agarwal (2008) research also indicate a positive
relationship of CEO reputation with corporate performance.
Hirst et al (1995) research indicates that judgment about future
performance of company is formed considering plausibility
of explanations and irrespective of reputation. This finding is
consistent with the result of Cianci and Kaplan (2010)
research. They found that CEO reputation doesn’t affect on
investors’ judgment about company future performance.
Manager reputation affects on his abil i ty to transfer
information to capital markets as credible (Williams, 1996).
A reliable relationship between manager and capital market is
of high importance because theoretical models suggest that
companies’ general information is less reliable experience,
low stock liquidity and higher estimated risk (O’Hara, 2003).
Reduced reliability leads to increased informational risk.
Changes in manager reputat ion may also affect on
SCMS Journal o f Indian Management , July - September, 2013 8
A Quarterly Journal
informational risk because manager reputation affects on his
ability to establish a relation with investors as credible. Cianci
and Kaplan (2008) research indicated that there is a significant
and positive relationship between judgments about manager
reliability and investors evaluations about investment
attractiveness in the company.
Barton and Mercer (2005) also found that manager reputation
affects on capital cost and its coefficient is negative. The
results of Agarwal et al (2008) research also indicate that
there is a negative relationship between CEO reputation and
capital cost. The results of Cianci and Kaplan (2010) research
imply a positive and significant relationship between CEO
reputation and stock attractiveness.
Various information and substitutions were used to estimate
and measure CEO reputation and other variables including: 1.
CEO Tenure 2.Past performance of company (adjusted return)
3. Foreign CEO (Milbourn, 2003; Jian and Lee 2011) 4.
Rewards granted by commercial journals and 5. Media exposure
(Johnson et al. 1993).In some researches, scenario was used
to examine the effect of reputation (Cianci and Kaplan, 2010).
Research hypotheses and goals
The present paper aims at studying the relationship between
“CEO pre-existing reputation and his explanations for poor
performance” and “investors’ judgment about future
performance and CEO current reputat ion.” So eight
hypotheses were formulated:
H1: there is a significant relat ionship between CEO
explanations about poor performance of company and
investors’ judgment about persistence of poor performance.
H2: there is a significant relat ionship between CEO
explanations about poor performance of company and
investors’ judgment about next year EPS.
H3: there is a significant relat ionship between CEO
explanations about poor performance of company and
investors’ judgment about investment attractiveness of stocks.
H4: there is a significant relationship between CEO pre-
existing reputation and investors’ judgment about persistence
of poor performance.
H5: there is a significant relationship between CEO pre-
existing reputation and investors’ judgment about next year
EPS.
H6: there is a significant relationship between CEO pre-
existing reputation and investors’ judgment about investment
attractiveness of stocks.
H7:there is a s ignif icant relat ionship between CEO
explanations about poor performance of company and
investors’ judgment about CEO current reputation.
H8: there is a significant relationship between CEO pre-
existing reputation and investors’ judgment about CEO
current reputation.
Research methodology
The present research is fundamental by purpose and
correlational and experimental by method. Data required was
gathered by questionnaire which is considered as one of field
methods.The questionnaire is according to the research
performed by Cianci and Kaplan (2010) which was modified
for higher validity after consulting with a number of
professors. Kronbach alpha coefficient calculated for the
questionnaire is 0.83 indicating good reliability .Information
obtained after analyzing data was used to reach research
purposes. Statistical test used in the research is Spearman
correlation coefficient.
Experimental variables of the research which are independent
variables include: (1) CEO explanations about poor
performance which are changed to plausible and implausible.
(2) CEO pre-existing reputation, changing to three cases of
unknown, favorable and unfavorable. CEO pre-existing
reputation means his reputation before poor performance.
Scenario was used to change independent variables. So
questionnaire includes six states as Table 1 shows below:
SCMS Journal o f Indian Management , July - September, 2013 9
A Quarterly Journal
Because all states were offered for individual interviewee, the
effect of their character properties is controlled (Libby et al,
2002; Smith, 2003).
Dependent variables of the research are: (1) persistence of
poor performance (2) next year EPS (3) stock attractiveness
and (4) CEO current reputation. CEO current reputation
means his reputation after poor performance.
Statistical universe and sample
In this research, two tastes groups including postgraduate
students of accounting, management and economy in the main
research and active investors in stock market in experimental
research were used. They both are identif ied as
nonprofessional investors. Students were employed as a
substitution for nonprofessional investors because in
researches focusing on investors’ judgment, tastes are
appropriate who have primary knowledge about accounting
and investment and researchers should avoid professional
tastes unless they are necessary for reaching research
purposes because it may make other researchers’ access to
these valuable resources difficult (Libby et al 2002).
Sample size was obtained 128 using Cookran formula. Totally
190 questionnaires were distributed among postgraduate
students of accounting, management and economy studying
in Ferdowsi university of Mashhad and 158 questionnaires
were gathered from which 30 were eliminated because of
controlling questions and finally 128 questionnaires were used.
In experimental research 24 questionnaires distributed among
active investors in Esfahan stock market branch were used.
Research findings
Descriptive statistics
Among 128 student interviewees, 56 were female and 72 were
male and their average age was 24.5 years old, 41 were
accounting students, 55 management students, and 32 economy
students. 31% of students had record of employment and
10% had record of investment.
Hypothesis tests
As noted, hypotheses were studied using Spearman test. The
results of testing hypotheses are shown in Table 2. As seen,
all hypotheses are supported in significance level of 5%.
Table 1. Questionnaire framework
1 Unknown implausible
2 favorable implausible
3 unfavorable implausible
4 Unknown plausible
5 favorable plausible
6 unfavorable plausible
Scenario NumberScenario studied
CEO reputation Explanation provided
SCMS Journal o f Indian Management , July - September, 2013 10
A Quarterly Journal
So it can be said that there is a significant relationship between
independent variables of CEO explanation and pre-existing
reputation and investors’ judgment about persistence of poor
performance, next year EPS, stock attractiveness and CEO
current reputation.
Above tests were performed on real investors and the only
difference between students (considered as a substitution for
nonprofessional investors) and investors is that H1 is rejected
for investors however it is supported for students.
Other findings
In addition to hypothesis results, additional evidences wereobtained about the relationship between CEO reputation andhis explanation plausibility. The results are shown in Table 3.This relationship has been tested using Spearman correlationcoefficient.
Table 2. The results of testing hypotheses
Hypothesis Teststatistic
Significant Test resultError level Type of Relationship
H1
-0.305 0.000 0.05 Accepted inverse
H2
0.355 0.000 0.05 Accepted Direct
H3
0.454 0.000 0.05 Accepted Direct
H4
-0.388 0.000 0.05 Accepted inverse
H5
0.375 0.000 0.05 Accepted Direct
H6
0.588 0.000 0.05 Accepted Direct
H7
0.548 0.000 0.05 Accepted Direct
H8
0.729 0.000 0.05 Accepted Direct
Table 3. Test of the relationship between CEO reputation and his explanations plausibility
As evident from test result, as CEO reputation is more
favourable when providing explanations about poor
performance, these explanations are more plausible. This test
was also performed on investors and the result indicates a
significant relationship between CEO reputation and his
explanation plausibility.
In addition, additional test was performed on the effect of
gender on judgments about persistence of poor performance,
next year EPS, stocks attractiveness and CEO current
reputation. This test was performed in the six states
separately and Man Whitney test was used. The results
indicate ineffectiveness of gender on judgments and in other
words, there isn’t a significant difference between male and
female judgments about poor performance persistence, next
year EPS, stock attractiveness and CEO current reputation.
It is of note that these tests were not performed because all
investors were male.
Conclusion
The results indicate that there is a significant relationship
between CEO explanations about poor performance and
nonprofessional investors’ judgment about poor performance
persistence, next year EPS, stock attractiveness and CEO
current reputation. In other words, as CEO explanations are
more plausible, in nonprofessional investors viewpoint, poor
performance is less sustainable, next year EPS will be assessed
higher, company stock will be more attractive and CEO
current reputation is evaluated more favourable.
Hypothesis Significant
0.422 0.000 0.05 Accepted direct
Significant Significant Significant
SCMS Journal o f Indian Management , July - September, 2013 11
A Quarterly Journal
The results also indicate that there is a significant relationshipbetween CEO pre-existing reputation and nonprofessionalinvestors’ judgment about poor performance persistence, nextyear EPS, stock attractiveness and CEO current reputation.In other words, as CEO reputation is more favourable, instudents’ viewpoint, poor performance is less sustainable,next year EPS is evaluated higher, company stock has moreattractiveness and CEO current reputation is evaluated morefavourable.
Additional evidences also indicate that there is a directsignificant relationship between CEO reputation and hisexplanations plausibility. In other words, as CEO reputationis more favourable when providing explanations about poorperformance, explanations are more plausible. In addition,evidences obtained indicate ineffectiveness of gender onjudgments and in other words there isn’t a significantdifference between male and female judgments about poorperformance persistence, next year EPS, stock attractivenessand CEO current reputation.
Suggestions for future researches
Suggestions for future researches include:
1. Using other types of attribution(such as ability and labourdifficulty) and comparing them, and
2. Performing research using active professional investors instock market.
Implicational suggestions
Employing managers who are reputable for successful andgood performance can lead to improved performance andsuggest good directions based on past experiences for successof company. If company faces poor performance which areresulted from external conditions, successful managers’explanations can reduce negative effects of poor performanceon investors’ predictions about future EPS and investmentattractiveness on stock.
Research limitations
Performing each research is associated with some limitations;the present research isn’t an exception. The most importantlimitations include:
1. Intrinsic limitations of questionnaire as one of tools ofdata gathering, and
2. Insufficient researches especially domestic researchesabout CEO explanations and reputation and its effect orrelationship with investors’ judgment.
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A Quarterly Journal
Family Conflict Resolution:Purchase role of Urban women
Anilkumar and Jelsey Joseph
Many aspects influence the consumer behavior of men & women as a family consumer of goods purchased for
common family use/consumption. Both internal and external aspects influence the consumer in the market. These
various aspects could be variables like the personal, psychographic, family and social normative variables as also
the perceived behavioral control variables as per the TPB. The Consumer is motivated through persuasive
techniques to change his/her attitude towards the purchase of goods/services. In this study the family aspects are
probed to throw more limelight on the influence of family purchase roles ,conflict resolution style in the current
family purchase attitude-decision making and consequent purchase behavior for durables with specific relevance
to urban Kerala families of Kochi, the fastest growing metro in Kerala, being a key test marketing center for the
entire spectrum of consumer durable products for common consumption with women in focus ,in view of higher
standard of living. The family dynamics are brought in through this FDU study.
Abstract
AnilkumarN, Sai Kripa, Lotus Garden, Hidayat Nagar,HMT Colony P.O, Kalamassery, Ernakulam, Kerala.09447986364(Cell);E mail : [email protected], [email protected],
Dr. Jelsey Joseph, Research Scholar & Chief Manager, Dean,Department of Commerce& Business Management,Karpagam University, Coimbatore, Tamil NaduE-mail : [email protected],
Key words: Consumer Purchase Behaviour, Durables, Family, PurchaseRole Orientation, Consumer attitude, Family buying, Joint decisions, Conflict resolution, WW-NWW Family buy
amily is the most important social institution, a
dynamic entity consisting of interrelated positions,
roles, role behaviours, role clusters, positional
careers and family careers. Family members may have different
roles to play in making decisions within the family; they may
initiate demand or contribute information, decide on where
to buy, which brand and style to buy, how to pay for the
products, how to consume any product, what benefit to expect
from products, and how to share their roles in maintaining
the product. Past research in this area has found that the
roles played by family members differ with regard to the
product being purchased, the stage in decision-making process,
and characteristics of families and spouses (Belch and
Problem solving/reasoning 1.97 2.58 1.03 2.64 3.53 2.86
Emotional 1.89 2.17 2.95 2.82 2.06 2.43
Wife’s category Income group family categoryConflict resolving style
WWF NWWF V. Low Low Medium High
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income group significantly used compliance/submissive style
of conflict resolution than the other income groups and
accepts social norms easily. However there was no significant
difference in the mean scores of WWF and NWWF in adoptingcompromise style. The VL Income group used little of reason/problem solving style compared to other income groups andhave higher levels of conflicts due to restricted availabilityof resources. Thus economic constraints/distress could leadto lesser communication within the family. The middle classexhibited most maturity in reasoning style. There is nosignificant difference between the WWF and NWWF groupsin adopting reason for resolving conflicts. The VL /L incomegroups adopted emotional strategy predominantly than theH income group, with the M income group adopting verylittle of this strategy. The NWWF employ more of emotionalstyle of conflict resolution than the WWF. In summary thelow income groups used problem solving, compromise,compliance, avoidance styles significantly lower than otherincome groups but used aggressiveness & emotionsignificantly higher than other income groups; the middleincome groups used positive problem solving, compliance,compromise, aggressiveness and avoidance significantly higher
than other groups; and there has been no significant difference
observed in the adoption of conflict resolution styles between
the WWF and the NWWF in the urban Kerala households.
� Null Hypothesis testing Results:
H07: Demographic factors do not have significant
influence on wife’s attitude- decision making for
purchase of white goods for common use of the
family.
H08: Social factors do not have significant influence on
wife’s attitude- decision making for purchase of
white goods for common use of the family.
H09: Marital quality does not have significant influence
on wife’s attitude-decision making for purchase of
white goods for common use of the family.
H10: Conflict resolution effectiveness within the family
does not have significant influence on wife’s
attitude-decision making for purchase of white
goods for common use of the family.
H07 a-g: The personal (demographic)aspects of wives does
not significantly influence the favourable attitude
towards the purchase behaviour towards durables.
The null hypothesis is rejected except marginally
for Occupation.
H08: The social(other’s influence ) aspect of wives does
not significantly influence the favourable attitude
towards the purchase behaviour towards durables.
Null hypothesis is rejected.
Table G: Null Hypothesis testing -Chi square test on demographics / other variables.
a Age/FLC Stage 19.817 9.488 S H0 rejected
b Family size 27.951 9.815 S H0 rejected
c Education 21.416 9.488 S H0 rejected
d Occupation 12.079 12.592 NS H0 Accepted
e Monthly Income of Family 22.417 12.592 S H0 rejected
f Family’s Spending pattern 29.682 16.919 S H0 rejected
8 Socio graphics /Peer influence 32.334 16.919 S H0 rejected
9 Marital quality of Life-Family 31.982 9.487 S H0 rejected
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Vegetable Price Rise:Rhythu Model Solution
Subhendu Dey and Salma Ahmed
Farmers’ markets have in various parts of the world provided an alternative way to shapethe relationship between farmers and
customers. It has been observed that farmers’ markets as a source of direct marketing are beneficial both to the farmers and the
customers. While farmers benefit primarily on account of getting better rates for their produce without their margins being eaten away
by middlemen, customers get fresh vegetables at an affordable price. With the inflation going into the double digits, it has had a
worrisome impact on the prices of vegetables from the customers’ point of view. The farmers also do not reap any benefit of the increased
prices. Some state governments have taken cognizance of this and have taken steps to check the arbitrary rise in prices of vegetables.
This paper looks at finding a long term solution to address this issue and presents the case of Rythu Bazaars – the farmers’ markets
of Andhra Pradesh which have been fairly successful in benefitting both farmers and customers. The paper studies the strengths and
weaknesses of these farmers’ markets and recommends other state governments to consider this model.
Prof. SubhenduDey Associate Dean – Academic Affairs andHead Knowledge Cell, Globsyn Business School, XI-11&12,Block-EP, Sector V Salt Lake Electronics Complex ,Kolkata – 700091, India Fax: +91 (33) 23573684E-mail: [email protected]
Dr. Salma Ahmed Associate Professor, Department of BusinessAdministration, Faculty of Management Studies and Research,Aligarh Muslim University, Aligarh, Uttar Pradesh, India E-mail: [email protected]
he indiscriminate increase in the prices ofvegetables has been bothering the middle class forsome time now. During early July 2012 a huge
concern was expressed by the West Bengal state governmenton the abnormally high prices of vegetables in the local marketsof Kolkata. According to news reports, hoarders wereresponsible for the price of vegetables shooting above theroof. In order to address the issue, the state government formedan 11-member committee, and the effect was felt immediately,with the prices coming down by about 40 to 50 percent. Thefall in the prices was attributed to increased inflow ofvegetables into the markets. There has been a sense of reliefamong the customers. While this effort from the West Bengalgovernment is praiseworthy, opinions differ regarding itssustainability. A parallel system of marketing where farmerssell their produce directly to the customers without anymiddlemen could provide a sustainable solution to thisproblem. Such a system will not only provide better rates tothe farmers, but also fair price for the customers to purchasetheir vegetables.
T
Abstract
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This paper studies Rythu Bazaars - the farmers’ markets of
Andhra Pradesh to suggest a sustainable model for other states
to emulate.
FARMERS’ MARKETS – KEY TO ADDRESSING PRICEWOES
Agri-marketing channels with multiple independent parties
all contributing considerably to increase in prices have
received substantial attention in recent years. Despite various
agri-marketing channels available, the marketing system for
fruits and vegetables is mostly in the hands of middlemen.
Middlemen exist at various levels between the farmer and theconsumer and exploit through malpractices in weighing,handling and payments. This has resulted in the farmers’ sharein the consumers’ rupee as estimated to be just 40 paise1.
Similar to all manufactured products,agri-products also moveinto the market through various channels. The various agri-marketing channels are depicted in figure 1.However, themajor difference between manufacturing goods and agri-products is on account of the market functionaries involvedin carrying the produce from the farmers to the ultimateconsumers.
Figure 1: Agri-marketing Channels
There is another agri-marketing channel available wherefarmers directly sell their produce to the consumers as shownin the figure below. The figure shows the interactions between
farmers and consumers through the farmers’ markets. Sincefarmers’ markets act only as facilitator, it has been showndifferently from farmers and consumers with dotted lines.
Figure 2: Farmers’ Markets
This model was brought to India in the late eighties, by MSGill, the then Union Agricultural Secretary. Impressed by the
concept of KalGhoj, the Russian farmers’ markets, this modelwas adopted in the states of Punjab and Haryana in the form
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of ApnaMandi, and thus the first farmers’ markets of India
was born. Seeing the success of ApnaMandi, the state
government of Andhra Pradesh started Rythu Bazaars in 1999.
The central idea of these farmers’ markets was to eliminate
middlemen and provide a platform for the direct interaction
between farmers and consumers. The farmers benefit by selling
directly to the customers and not paying any commission to
the middlemen and customers get good quality produce at
reasonable prices.
STUDIES ON FARMERS’ MARKETS
There have been some studies undertaken on farmers’ markets
in various countries of the world. Most of those studies
indicate multiple benefits for both farmers and consumers,
and show how these markets help eliminate middlemen and
thereby creating a sustainable model for getting fresh, locally
grown vegetables at a fair price. Wolf (1997) in a case study
examined responses of consumers with the objective of
comparing the profile of farmers’ market shoppers to those
who do not shop at farmers’ markets. In his research he found
that consumers have indicated that quality and value are among
the most important attributes when purchasing produce. The
case study further concluded that consumers perceive farmers’
market produce to be fresher looking, fresher tasting, higher-
quality, more reasonably priced and as such, better value for
the money, more likely to be grown in their country, more
likely to be locally grown, more likely to be good for the
environment, and more likely to be traceable to the processor
and grower when compared to supermarket produce.
Govindasamy et al (1998) looked at the resurgence of farmers’
markets in New Jersey which had been welcomed by farmers,
consumers, and municipalities. It allowed farmers to capture
a greater share of the consumers’ food expenditure thus
increasing their profitability, while the consumers’ need for
fresh, high quality commodities as well as for farm-based
recreational experiences is met. The survey based study was
undertaken with the objective of finding the efficiency of the
farmers’ markets in terms of management and organization,
providing an overview of various characteristics of managers,
and identifying factors that have an effect on the organization
and well-functioning of these markets. It concluded that when
selecting the markets’ sites factors affecting choice were
visibility, sufficient parking, easy accessibility and traffic
flow, available space for farmers’ stands, proximity to
downtown areas, number of potential customers, safety anduse of public land for insurance and financial purposes. The
insights provided by this research help to identify the qualitiesneeded for successfully managing a farmers’ market as well asthe constraints affecting these markets so that their efficiencycould be improved. Feenstra and Lewis (1999) brought in anew dimension by finding that farmers’ markets offer theproducers opportunities to expand their businesses bydeveloping new market venues (including community-supported agriculture, inst i tut ional food buyers andgovernment food programs) creating value-added products;and making connections with the agritourism industry. Theyconclude that the size and location of host communitiescontribute different kinds of business expansion opportunitiesand markets in rural areas offer some of the strongestcommunity support to vendors and link them with the touristindustry. They also contend that managers of the farmers’markets can help growers capitalize on these opportunitiesthrough the rapport and connections they develop withcommunity businesses, associations and institutions. Trobe(2001) studied the potential benefits of marketing food directlyfrom producers to consumers, and hence circumventing the‘middlemen’ in the food supply chain. This qualitative studyconcluded that benefits have been accrued by both farmersand consumers. Consumers get locally grown, fresh, healthyand, in many cases, organic food at affordable prices, whileproducers get more value of their produce. The methodologywas survey based.
Chengappa (2005) in his study focused on the increasingimportance of agricultural marketing in the current times,especially in the context of economic liberalization andglobalization. He probes into the inefficiency of the marketingsystem and also reviews the institutional developments inagricultural marketing in the country and assesses theirefficiency and adequacy in the present economic andagricultural scenario. The study concludes that the regulatedmarket model is in vogue in India for more than a century andwill continue for many more years. He further concludes thatthe efforts have been made to regulate the trading practices,especial ly buying and sel l ing and to some extent ,standardization and grading. He advocates that in the changedglobal scenario, emphasis should be on the performance of allmarketing functions and therefore all-out effort should bemade by providing required infrastructure, price transmissionand policy support to the agricultural markets. He furthersuggests that an increase in public investment is desired forthe development of market infrastructure. He suggests thatthe government should come up with a comprehensive policyframework to encourage private investment under the systems
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of ‘build, own and operate’, ‘build, own, operate, and transfer’
etc. for the development of rural marketing infrastructure.
Sudha and Gajanana (2005) reviewed the developments and
performance of agricultural marketing institutions in India
with a focus on horticultural sector. The objective of the study
was to examine the mechanism to link production with
consumption. They conclude that though India has achieved
a comparative advantage and self-sufficiency in the production
of a number of agricultural crops, the predominance of pre-
harvest contractor and commission agent as an important
marketing channel continues till date; institutional innovations
integrating production with marketing and trade are yet to
emerge; and institutions integrating small farmers with
domestic and international markets (with a focus on value
addition) are non-existent. They highlight that there exists a
gap with respect to marketing and postharvest handling of
agricultural produce in India. They further conclude that direct
interventions in agricultural markets by the government have
been an important mechanism for improving marketing
efficiency and these interventions have been through a number
of agencies, which have evolved over a period of time. They
contend that the impact of these efforts has been mixed and
efforts to improve the efficiency of agricultural marketing
institutions are still being pursued on a high priority. They
identified that the weakest link has been the inability to
integrate production with marketing and processing for
achieving the ultimate objective of improving access of small
producers to expanding markets and trade.
Inference - It is a well-known fact that middlemen exist at
various levels between the farmer and the customer and both
suffer on account of the existence of middlemen. As mentioned
earlier, the situation is so bad that farmers actually end up
getting only 40 paise for every rupee spent by the customer.
On top of this there is an additional estimated loss in handling
of vegetables in the traditional channel of marketing of about
30 to 35 percent. This leaves very little with the farmers who
continue to remain poor. On the other hand, prices of
vegetables have increased at alarming pace, forcing state
governments like that of West Bengal to take necessary steps
to curb this bizarre rise in prices of vegetables. A look at
Table 1 which compares the prices of some of the vegetables
before the government of West Bengal took measures to check
the price rise as compared to the prices after the mentioned
measures were taken alongside the rates prevailing in the
Erragada market, one of the Rythu Bazaars of Hyderabad
during the same period, will give a clear idea to the readers
about the impact that hoarders and middlemen have on theprices of essential vegetables.
Table 1 – Price Comparison
Period of Establishment 11.8728*** 33.258***
Green Chilly 120 – 200 70 - 100 12
Tomato 30 – 40 25 - 30 22\
Brinjal 40 – 60 30 - 40 8
Ribbed Gourd 25 – 40 20 – 25 12
Capsicum 100 – 150 70 - 100Not available
Ladies finger 20 – 30 20 18
Bitter Gourd 40 – 60 40 12
VegetableErragada Rythu
Bazaar ratesKolkata market rates
post interventionKolkata market ratesbefore intervention
It is quite apparent that despite some good measures takenby the state government, there still exists a huge differencebetween the rates of Rythu Bazaars and the Kolkata markets.As mentioned earlier, there have been some doubts expressedregarding the sustainability of the actions taken thereof andhence the long term control over the rise in price of vegetables.
ANDHRA PRADESH – A PROSPEROUS STATE ANDSETTING UP OF RYTHU BAZAARS
The state of Andhra Pradesh was formed in the year 1953separating certain districts from the erstwhile compositeMadras state, with State Capital at Kurnool. Later the state
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of Andhra Pradesh was created with effect from November01, 1956 merging the Telangana districts situated in theDeccan plateau and delineating Bellary area, making AndhraPradesh the 5th largest state in the Indian Union both in termsof geographical area and population.
The state has a tropical climate with moderate diffusion tosubtropical weather. Humid to semi-humid conditions prevailin the coastal area while arid to semiarid situations pronouncein the interior parts of the state, particularly Rayalaseemaand some districts of Telangana. Area under Horticulture cropsduring 2001 was recorded as 13.78 Lakh Hectares with anannual production of 9.5 Lakh M.Ts, which showed aconsistent year on year growth and in 2006-07 the area wasabout 17.85 Lakh Hectares with production of 163.6 LakhM.Ts.Andhra Pradesh is the second largest producer of fruits,vegetables and flowers in the Country. It is the leader inproduction of Citrus, Chillies, Turmeric and Oil Palm andalso major producer of Cocoa, Cashew, Guava, Coriander,Banana, Ginger and Coconut.
Despite all these, farmers in Andhra Pradesh have notflourished, and hence in this backdrop, the state governmentthought it necessary to set up Rythu Bazaars in order to savethe farmers from getting exploited. These markets providefarmers with certain facil i t ies that help increase theeffectiveness of direct marketing. Among the facilitiesprovided include the entire infrastructure built on a minimum1 acre land in locations near main road, railway stations, busdepots, bus stops, community centres, residential localityetc. The market yards have facilities including sheds, pricedisplay boards, storage of unsold produce, provisions ofweighing scales for all farmers, electricity, telephone, fax,drinking water, toilets with sanitation facility, garbagedisposal/cleaning facilities, and services/facilities for theconvenience of customers viz. parking of vehicles, notes tocoin changing machines, grievance redressal mechanism etc.These markets operate outside the purview of the AgricultureMarket Committees and are managed by Estate Officers(administrative in-charge of the markets) under the control ofRevenue Department of the Andhra Pradesh StateGovernment.
MARKETS SURVEYED
For this research, nine Rythu Bazaars were selected primarilybased on the convenience of the researcher. Out of the 2 RythuBazaars in Hyderabad and 7 at Rangareddy District, thisresearch covered seven market yards – 1 in Hyderabad at
Erragada, and 6 in Rangareddy district at Mehdipatnam,Kukatpally, Saroornagar, Vanasthalipuram, Qutubullahpur,Alwal and Ramakrishnapuram.
FACILITIES PROVIDED AT RYTHU BAZAARS
Location - The Rythu Bazaars surveyed for this research areall located at places which are very close to residential areasthereby enabling maximum number of customers to visit thebazaar. All the bazaars are away from factories and otherindustrial establishments, dairy and poultry farms, kilns,sources of fire, garbage dumping grounds, slaughter housesetc. Sufficient parking and maneuvering spaces have beencreated for vehicles.
Layout - The layout of the market yards have been designedto facilitate easy movement of people (farmers bringing intheir commodities for sale and customers) and vehicles. Thestalls constructed in the market yards have display floors ofthe stall at sufficient height from the ground level to preventinundation. The staff at Rythu Bazaar ensures cleanliness ofthe market yards.
Identifications of Farmers - Farmers are identified from acluster of 10-15 predominantly vegetable growing villages toenable provision of horticulture services, inputs andtransportation arrangements to the Rythu Bazaars effectively.After the clusters are identif ied by the Hort icultureDepartment, a team comprising the Mandal Revenue Officer,Horticulture Officer/Consultant, and the Agricultural Officerin the villages identify the farmers. The team addresses thevegetable growing farmers on the advantages of doing businessat Rythu Bazaars so that they get motivated towards realizingthe benefits of operating from these markets. Among theservices provided are horticulture services, seed supply atsubsidized rates, t ransportat ion arrangements, pricemechanism, and elimination of middlemen. The team thenvisits the fields of the interested farmers and issues temporaryidentity cards on the spot. A week later the farmers getlaminated photo identity cards.
Transport Facility - The market administrators arrange forthe transport facility for picking and dropping the registeredfarmers to the Rythu Bazaars. This is done through a tie-upwith Andhra Pradesh State Road Transport Corporation.
Allotment of stalls – Since the stalls are developed by thegovernment, there is no fixed stall allotted to any farmer. Thestalls are allotted everyday on a first come first serve basis.These stalls are allotted to the farmers free of cost.
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Price Fixation – Fixing of prices for all vegetables is done
through a committee comprising farmers from the representing
mandals and the Estate Officer. The committee receives the
wholesale prices of the vegetables through fax every morning
between 0730 to 0800 hours. This data is provided by the
Marketing Department. About 20-25 percent is added to the
wholesale prices to arrive at the Rythu Bazaar prices but not
exceeding the retail prices in the local areas. For different
varieties of the same vegetable, different prices are fixed. The
prices are displayed at prominent places in the market yards
for the ease of both farmers and customers. Estate Officers
ensure that the fixed prices are strictly adhered to and they
also resolve disputes if any.
Supply of weighing scales – All the registered farmers are
supplied weighing scales at the market yards free of cost.
This ensures assurance of fairness in weighing and both farmers
and customers do not have to bother about losses on account
of improper weighing. The weighing scales are issued every
day and at the end of the day the same is returned by the
farmers to the market officials.
Farmers resting room cum training center- A room of
size 3.6 m x 6 m acts as resting rooms for the farmers. The
rooms are also used as a training center for imparting training
on nursery development/vermicomposting/biofertilizer
preparat ion integrated pest management, nutr i t ion
management etc.
Small Sized Godown– There is also a provision for a small
50/100 MT capacity godown for storing non-perishable goods
for short durations.
Market Office – An office is created for the staff. The office
has equipment like computer, printer, telephone,fax machine
etc. for the day-to-day running of the markets.
Other facilities – Among the other facilities provided at the
market yards, are electricity,water supply, sewage systems/
garbage disposal, plastic crates, fire-fighting equipment etc.
THE RYTHU BAZAAR MODEL
This section undertakes a study of the strengths of Rythu
Bazaars which the authors feel, are necessary for sensible
policy making. Like any other model there are some
weaknesses in the Rythu Bazaar model as well which havemainly cropped up on account of improper execution and not
because of inadequacies in the planning. Some of the
weaknesses have been touched upon in this section, which
are very clearly on the operational front.
Strengths
This section focuses on the areas of strength of Rythu
Bazaars.
Government Assistance in the development of RythuBazaars – Rythu Bazaars are located in government plots
convenient to farmers as well as customers. Built in a vacant
land of minimum 1 acre, the infrastructure is provided by the
government as has been mentioned earlier. The market yards
are mostly set up by the state government. For setting up of
agricultural markets, funds are sourced from NABARD
(National Bank for Agriculture and Rural Development)
through RIDF (Rural Infrastructure Development Fund) and
NCDC (National Cooperative Development Corporation).
� Other Assistance from the State Government – Apart
from developing the market yards, free supply of weighing
machines and free transport to the farmers’ market in
selected Andhra Pradesh State Road Transport
Corporation run buses, is also provided to the farmers.
Horticultural services and seeds supplied at subsidized
rates also benefit the farmers.
� Quality of vegetables – In another research done by
Dey (2012), it was found that 92.9 percent customers
were satisfied with the quality of vegetables sold at these
market yards.
� Quantity of vegetables sold every day – During the
week days, the quantity of vegetables that are brought to
each of the market yards is in the range of 2000 - 2500
quintal. This goes up by about 500 quintal in the weekends.
� Total worth of vegetables sold every day – The total
worth of transactions that happen on an average on week
days ranges between 15 - 18 lakhs which goes up to 25 -
30 lakhs during weekends.
� Immediate realization of cash - Sale of vegetables in
Rythu Bazaars is only for cash and hence there is no
problem of delayed payment or bad debts.
� Number of farmers and customers at Rythu Bazaarsevery day – As a case study, the researchers took the data
of the Erragada Rythu Bazaar of Hyderabad which is a
model Rythu Bazaar. It has been observed that on
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weekdays on an average 300 to 400 farmers operate in the
market. The number of customers visiting the market yards
ranges from 16000 to 20000. These numbers go up
significantly during the weekends and holidays to 500 to
600 for farmers and 25000 to 30000 for customers.
� Price Fixation - Price is determined by the Estate Officers
in consultation with the farmers’ committee. The process
is transparent and the prices are usually 20 – 25 percent
higher than the whole sale price and lower than the local
retail market prices in the area. Even the customers benefit
as they receive the vegetables at a price which is lower
than the supermarkets.
� Proper Weighing - When the farmers enter into a Rythu
Bazaar the vegetables brought by them are weighed
correctly and then the quantity is entered in a register.
The farmers therefore do not lose on account of faulty
weighing practices. Also the customers get vegetables that
are weighed accurately.
� Administrative support – Every Rythu Bazaar has an
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Organizational Flexibility:Real Option Approach
Organizational flexibility is the main capability that enables organizations to face environmental fluctuations, as it makes
them more responsive to change. This paper study the long term impact of HR practices on organizational flexibility with
help of real option approach. Concept of real option is very important in understanding various HR options created by HR
practices. HR options are to be viewed as a sub-set of real options. HR options are generated through a specific type of HR
practices that are intended at building a HR capability to respond to future uncertain events. Paper develops a conceptual
framework to identify the uncertainties associated with human assets and provides measurement approach by deploying
methods of extended NPV and real options. Better HR practices in terms of HR planning, recruitment and retention
strategies will effectively respond to external environment and hence enhances organizational flexibility.
Key words: HR practices, Uncertainty, Organizational flexibility, NPV, Real Options
Abstract
n the present environment of globalization andincreased competition, most organizations considertheir employees often called human resource (HR ) to
be their most valuable strategic assets. It is well recognizedthat one of the sources of sustainable competitive advantageresides in non-tradable, difficult to imitate, firm-specific HRassets of the organization (Sirmon, Hitt & Ireland, 2007). HRassets are valuable for the organizations because of theirability to create, use and share knowledge. Hence, developinga critical mass of employees who are knowledgeable or skilledmay constitute a potential source of competitive advantagefor the organizations. The organizations do not achieve andsustain a competitive advantage simply by possessingknowledge-based resources. Hence, if organizations areseeking competitive advantage through HR, they should designHR practices in ways that allow it to leverage and exploitthese resources and enable employees to use the knowledgefor competitive edge.
I
Pankaj M. Madhani
Prof. Pankaj M. Madhani, Associate Professor,ICFAI Business School (IBS), IBS House, Near GNFCTower, S.G. Road, Bodakdev, Ahmedabad - 380054,E mail: [email protected]
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Literature Review
Organizational flexibility is the main capability that enablesorganizations to face environmental fluctuations, as it makesthem more responsive to change. The l i terature onorganizational change considers flexibility to be one of thedynamic capabilities through which organizations tacklechange (Wright & Snell, 1998; Zajac et al, 2000). Flexibilityhas been defined as an entity’s ability to change its policies,practices or procedures quickly and easily to adapt to thediverse and changing demands of the environment (Rowe&Wright, 1997).
The organizat ions most sensi t ive to changes in theenvironment have a strategic organizational capability thatenables them to change easily and thus produce acceptableresults without incurring high reorganization costs. Thus,organizational responsiveness is based on the concept offlexibility (Antonio & José-María, 2009). Organizationalflexibility in the broad sense includes different kinds offlexibility defined by a set of resources, processes andmanagerial functions. This paper uses the term organizationalflexibility to refer to the overall flexibility of an organizationdefined by a set of HR practices.
HR practices represent organization capabilities that createvalue for the organization by developing enabling human skillsand behaviour (Sanyal & Sett, 2011a). The success oforganizations in the present competitive environment largelydepends upon the calibre of their HR capital and innovativeHR practices. Recent research on best HR practices has shownthat the HR function is a source of competitive advantage andas such it is indeed an important success factor of theorganizations. The use of strategic HR practices and processesfor managing human capital can give a clear performanceadvantage through cost savings from increased utilization,lower turnover, and higher productivity of work force.According to the theory, the management of people, also calledas human resource management (HRM) involves effective HRplanning as well as practices in order to help organizationssuccessfully accomplish their business goals. With effectiveHRM practices, adequate returns to stakeholders will begenerated by enhancing labour productivity, social legitimacy,and organizational flexibility (Boxall & Purcell, 2003).
With regard to human resources, functional and numericalf lexibi l i ty have been emphasized as ways in whichorganizational flexibility can be influenced through HRpractices (Friedrich et al, 1998; Kalleberg, 2001). Namely,
numerically flexible organizations adjust the workforce to
changes in demand, hiring to bring in new skills as needed and
on the other hand implementing layoffs to eliminate redundant
or obsolete skills; while functionally flexible organizations
employ a stable core of cross-functional workforce that adapts
their work to changes in demand (Atkinson, 1984). Boxall &
Purcell (2003) call numerical and functional flexibility short-
run responsiveness and extend this concept to the longer
horizon. They cite Dyer & Shafer (1999) to introduce the
concept of long-run organizational flexibility. The focus of
their concept is not on adjusting workforce to demand, but
rather on improving organization’s ability to respond
environmental uncertainty and enhance organization flexibility.
HR professionals in some organizations focus on solving
operational, day-to-day business problems because of a lack
of understanding of broader, strategic issues (Tichy, 1983).
Consequently, HR departments in these organizations are
reactive, fire fighting departments and are not as effective as
they could be. Hence, effectiveness and efficiency of HR
practices were thus predominantly tested for their short-term
effects. Most of the prior research has focused mainly on
different ways in which HR practices contribute to labour
productivity and consequently to improved financial
performance. However, lack of adequate longitudinal research
design hindered the development of conceptual as well as
empirical work that emphasize more long-term impact of HR
practices such as the effect on organizational flexibility (Berk
& Kaše, 2010). This research works in this direction and
focuses on study of long term impact of HR practices on
organizational flexibility.
Measurement and Evaluation of OrganizationalFlexibility
It is important to understand that strategic HR planning and
practices will take a long term view of things. Most of the
methods for evaluating HR practices, have failed to take into
consideration the uncertainties inherent in HR assets and the
projects in which they are engaged. Therefore, these evaluation
methods have performed poorly in evaluating the effects of
HR practices on the ability to properly manage future
opportunities as they lack the ability to measure either the
current value of HR assets or their flexibility (Sanyal & Sett,
2011b). Measuring the effects of HR practices on the
organization performance, has been a very popular research
agenda in the strategic human resource management (SHRM).
One area that is still missing in the SHRM literature is a
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valuation methodology that can measure the value oforganizational flexibility created by HR practices.
The issue of valuing flexibility has already been addressed infinance research (McDonald & Siegel, 1986), especially inthe project appraisal and capital budgeting techniques by usingconcept of the discounted cash flow (DCF) methods such asthe net present value (NPV) and internal rate of return (IRR).When applied to HR investment, such NPV approach measuresthe present value of future cash flow derived from investmentin HR by discounting such future cash flow by an appropriaterate representing riskiness of cash flow associated with suchHR investment. As a decision rule, positive NPV projects areaccepted for investment (Bowman & Moskowitz, 2001).
Traditional Investment Decision Tools: MajorLimitations
Managerial flexibility in increasing or deferring investmentswhile awaiting new information, is an important aspect ofcorporate strategy but hardly incorporated in the traditionalDCF model (Smit & Trigeorgis, 2004). The simplicity andconsistency made NPV tool the most widely used projectappraisal tool for practitioners. Nonetheless, it demonstratesweaknesses in dealing with uncertainty, complexity, and aboveall, flexibility. In an NPV approach, different managementforecasts of project values are weighted in order to get a singleforecast of the average project value, thereby neglecting theextra information in the entire data set. NPV approach failsto fully incorporate the myriad options that are usuallyassociated with many investment projects. Because theinvestment project is a set of different options, a model isneeded to account for uncertainty and to permit flexibility.
While conceptually relatively simple NPV rule with followingshortcomings limits its scope of valid application (Madhani,2009):
1. It does not explicitly deal with uncertainty whenvaluing the investment project;
2. It does not consider the extent of management’sflexibility to respond to uncertainty over the life ofthe investment project.
3. It ignores the value of creating options. Sometimesan investment that appears uneconomical whenviewed in isolation may, in fact, create options thatenable the organizat ion to undertake otherinvestments in the future should market conditionsturn favourable.
When these shortcomings exist in an investment project, theNPV consistently underestimates the value of a project as itignores the value of the implicit options that management hasin the project. Such techniques use tangible factors and donot take into account intangible factors such as futurecompetitive advantage, future opportunities, and managerialflexibility. Major shortcomings of NPV rule is explainedbelow:
Dealing with uncertainty
Traditional NPV calculations do not factor the investment’srisk except for an increase in the discount rate used in thecalculation. They also leave no scope for changing the courseof action when new information becomes available. Decisionunder conditions of uncertainty should be made on the basisof the current state of information available to decision makers.Current project valuation by NPV method has proved itselfto be incomplete as it fails to properly account for uncertainty.If the expectation of the NPV were negative for theinvestment, the conventional approach would be to reject theinvestment. However, if one has the ability to delay thisinvestment decision and wait for additional information, theoption to invest later has value. This implies that theinvestment should not be undertaken at the present time. Itleaves open the possibility of investing in future periods.The weakness of NPV approach is its failure to account forhow uncertainty, rather than implying a higher risk-adjusteddiscount rate, can increase the value of a project investment.Therefore, by assuming management’s passive commitmentto a certain operating strategy, NPV usually underestimatesthe upside value of investment.
Dealing with flexibility
In the context of managerial flexibility, determining the priorityof potential investments is vital in strategic planning. NPVrule assumes a fixed scenario without any contingencies. StaticNPV fails to factor in the full range of opportunities that anew and innovative strategy may create for a firm in the future.NPV approach assumes that all future cash flow is static,neglecting the real-world options to stop investing in theproject or change course because of market circumstances.NPV has then no regard of flexibility through the life of theinvestment project. Managers of the investment may takestrategic decisions along the investment process according tothe way conditions (market or others) evolve. TraditionalNPV tool fails as it neglects the value of flexibility: howmanagers would respond to unfolding events in uncertain
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markets. This approach assumes project risks remain constant
over the life of the strategy. It also, fails to factor in the full
range of opportunities that a new and innovative strategy
may create for a firm in the future. These rules can mean very
wrong decisions, for investing in projects in which waiting is
better, or not investing in good emerging technologies with
high growth options.
Managers have the flexibility to sell the asset, invest further,
wait and see or abandon the project entirely. NPV based
approaches assume implicitly that a project will be undertaken
now and operated on continuously at a set time scale, until
the end of its expected useful life, even though the future is
uncertain. Therefore the NPV ignores the upside potential of
added value that could be brought to the project through the
flexibility and innovations of management to alter the course
of investment. The NPV rule also has the effect of ignoring
the presence of any flexibility that management has to respond
to a changing environment. This can fundamentally change
the realized (as compared to the expected) value of a project.
The NPV rule would provide an accurate estimate of a
project’s value only if there is either no flexibility or if there
is no uncertainty. However, the combination of uncertainty
and managerial flexibility leads to the presence of real options
in capital investment decisions. Where this combination exists,
the NPV approach is flawed as a decision rule. It gives
estimates of project value that are biased downwards because
it ignores the value of the real options incorporated in the
project.
Dealing with options
Traditional investment appraisal techniques such as NPV can
be conceived as being concerned with a one-shot valuation of
an investment in an asset. The initial investment is followed
by a series of (often) uncertain cash flows over time. NPV
approach neglects the insight which arises from recognizing
the phased nature of many investment decisions, which may
begin with exploratory phases before final asset investment
decisions are made. Many investment projects have in effect
an options phase prior to the asset phase. During the options
phase, investments are not being made in an asset to generate
a stream of cash flows but to establish the opportunity (but
not the obligation) to subsequently invest in such an asset.
With a standard NPV analysis, it is not practical to capture
the full value of an investment strategy that involves real
options. The NPV method implici t ly assumes pre-
commitment to future plans and defines an investment decision
as a now (go) or never (no go) proposition; it does not properly
take into account the value of a wait-and-see strategy to make
decisions as the value of the project evolves and uncertainty
is revealed.
Real Options: Major Benefits in Dealing with Uncertainty
Real options theory (Dixit & Pindyck, 1994) suggests that
options on assets (tangible or intangible) help better exploit
future opportunities for expanded returns while reducing
downside risk. Real option describes an option to buy or sell
an investment in physical or intangible assets rather than in a
financial asset. By definition, a real option is the right, but
not obligation, to take an action -to buy or sell an investment
in physical or intangible assets - at a predetermined price
called the exercise price for a predetermined period of time
i.e. the life of the option (Trigeorgis, 1996). Background of
real options lies in financial options where the underlying
asset (i.e., the assets on which an option is written) is a
financial security traded in a capital market. Real options are
of two types: call and put options. A call option provides its
holder with the possibility to purchase, whereas a put option
gives the possibility to sell a particular (financial, physical,
intangible) asset at a pre specified exercise price. In addition,
such options can be classified with regard to the time they
can be exercised. Specifically, options with a fixed maturity
(i.e., a specific date on which the option can be exercised) are
called European options, whereas those that can be exercised
anytime up to their maturity are known as American options
(Hull, 2005). The option value is contingent upon the value
and other characteristics of the underlying asset.Real options
are appropriate as a tool for strategic reasoning and the
valuation of several types of flexibility created by strategic
management. Thus, organizations might find it valuable to
make an initial investment in flexibility to create the option
to defer, expand, grow, abandon, or flexibly switch the mix or
the output scale.
Real options approach is a method of evaluating and managing
strategic investments decisions in an uncertain business
environment. It seeks to quantify numerically each of the
investment options available in a particular situation and refers
to the application of option pricing theory to investment of
non-financial or real or brick and mortar assets. Real option
can also be defined as a right to take an action in the future,
without an obligation to do so. Real options analysis promises
much in terms of providing improved estimates of project’s
expected value. However, this does come at a price –the extra
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analysis required and the additional complexity of the
valuation model. This approach has the potential to includethe value of the project from active management and strategicinteractions. Real option seeks to uncover and quantify aproject’s embedded options, or critical decision points. Thegreater the uncertainty and flexibility results into the greaterthe value of management’s options. The best known optionpricing model in financial economics is the Black-Scholesoption pricing model (Black & Scholes, 1973). It is based onstochastic calculus.
There are several other benefits for decision makers if theydecide to use real option analysis:
1. It forces a change in the emphasis of decision makers(and the valuation process) from ‘predicting thefuture outcome perfectly’ ( the NPV rule) toidentifying what can (or rather should) be done aboutresponding to business uncertainty.
2. It gives decision makers the ability to identify the
optimal levels of flexibility.
3. By focusing management’s attention on responding
optimally to uncertainty as it evolves, it promotes
a sense of discipline for the management of assets
that extends over the entire life of the project –not
simply when the decision is originally made.
Analogy between Financial and Real Option
Real option is a right but not an obligation to acquire the
present value of expected cash flows by making an irreversible
investment outlay on or before the date the opportunity will
cease to exist. Real options only have value when investment
involves an irreversible cost in an uncertain business
environment. Real option is compared with financial option
as shown in Table 1:
As explained below, different options are endowed withdifferent sources of flexibility. This flexibility means that aninvestment in HR is undertaken under more favourablecircumstances than assumed by the traditional DCF model.
The growth option for early investment
This option refers to the ability of the organization to makeHR investment for future requirements. In recession or down
cycle of economy, cost considerations will dominate the HR
practices and strategies. In a recession the demand for the
goods and services of the organization and, in turn, the
demand for the workforce will go down (Madhani, 2010 b).
Right HR planning, recruitment practices and retention
strategies will take advantage of the recession and arm the
organization with the best of the newly available talent.
Layoffs caused by economic downturns typically produce
1 Call Option Option to invest
2 Stock price Present value of expected cash flow
3 Exercise price Present value of investment outlays
4 Time to maturity Length of deferral time
5 Risk-free rate Time value of money
6 Variance of stock returns Volatility of investment’s returns
7 Dividends Project cash flow
8 Short maturity (in months) Longer maturity (in years)
9 Personal assumptions and actions have Personal assumptions and actions drive theno bearing on valuation value
10 Competitive or market effects are irrelevant Outside factors drive the value to its value and pricing
11 Marketable and traded security with comparable Not traded and proprietyand pricing information in nature with no market comparable
Financial Option Real Option
Table 1: Financial Versus Real Option
Sl.No.
(Source: Madhani, 2009)
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alternative or switch use, making use of functional flexibilitywill be superior to the churning alternative.
Real Options in HR Practices: Enhancing Flexibility ofOrganizations
Concept of real option is very important in understandingvarious HR options created by HR practices. HR options areto be viewed as a sub-set of real options. HR options aregenerated through a specific type of HR practices that areintended at building a HR capability to respond to futureuncertain events and hence, not all HR practices are options.Bhattacharya & Wright (2005) defined HR options as“investments in the human capital pool of an organizationthat provide the capability to respond to future contingentevents”. In this way, certain HR practices are valuable to theorganizations because they increase their flexibility.
HR options provide a strategic organizational capability toadapt to future contingent events and flexibly manageuncertainties arising from fluctuations in the value of theunderlying human asset. The valuation of each of these HRoptions created by HR practices should be approached byconsidering the source of their flexibility (i.e., the nature ofthe HR practices of the organization). If flexibility is createdby an HR option to expand and grow, then a call option shouldbe used in the valuation model. Conversely, a put option ismore suitable for valuing flexibility created by an HR optionto abandon. Retraining and relocating the work force can bringconsiderable productivity gains to the organization, this willalso add to the effectiveness and flexibility of the workforce.Following are major types of workforce flexibility:
Co-ordination Flexibility
Co-ordination flexibility is the extent to which the organizationcan reconfigure the chain of resources and redeploy theresources. These flexibilities are choices that firms make withrespect to the dynamic environment. Variety of skills in theworkforce and ability to acquire diverse skills from contingentworkforces are the indicators of co-ordination flexibility(Wright & Snell, 1998).
Functional Flexibility
Functional flexibility implies that employees are able to workon different tasks and under diverse circumstances and thatthe costs and time needed to mobilize employees into newduties or jobs are low (van den Berg & van der Velde, 2005).It is critical that the core employees of an organization are
large supplies of highly qualified and experienced individualsin the employment market. Such downturns or recession alsoprovide surpluses of high-quality fresher or inexperiencedjob applicants graduating from colleges and universities,available at relatively cheaper cost. This means that, duringeconomic downturn the bargaining power is with theorganizations.
Thus, organizations can invest in human capital for futurerequirement during economic downturns by stockpiling high-quality key personnel critical to strategic initiatives. Suchhiring practice will also increase retention rate of work forceas workers hired during a recession may not switch jobs afterthe recovery starts because of the preference for the statusquo in decision making. Satisfied employees stay at theirjobs and do not search for information on other employmentbecause of the increased loyalty effect and organizationalcommitment effect. Lower turnover among employees hiredduring economic downturns is also a result of their increasedrisk avoidance (Madhani, 2011 b).
The option to alter operating scale
In terms of real options theory, this option refers to the abilityof HR investment to adjust the operating scale of HRinvestment (i.e. to expand HR deployment or to contract andoffshore) according to the specific needs of the organization.The ability of the organizations to expand or contract at alater point in time adds value to the HR investment and henceinfluences the investment decision. The flexibility to adjustemployment levels (numerical flexibility) and the flexibilityto adjust working hours (temporal flexibility) will impact HRinvestment decisions by influencing the value of the optionto alter operating scale.
The option to abandon or to switch use
This option refers to the ability of the organization to disposeof its HR investment project and divest by layoff / terminationas well as to turn the HR investment to an alternative use.The value of best alternative use of HR investment, in turn, isnot only affected by the flexibility of the workers employedbut also by the broadness of their skills (functional flexibility).If employees do not have the flexibility to perform new tasks,subject to employment protection laws, to dismiss unskilledemployees and replace them by newly hired ones (i.e.churning) to compensate for a lack of functional flexibility.As long as some part of the organization-specific knowledgeheld by the incumbent employees will still be valid in an
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functionally flexible so that in a changing environment, they
can take over other jobs through job rotation. Organizations
should also strive for functional flexibility of employees
through job enrichment (vertical) and enlargement (horizontal).
Organizations facing uncertainties due to rapid fluctuations
in product mix and volume, are expected to have greater
strategic flexibilities and are likely to show superior long term
performance if they are able to create the requisite functional
as well as numerical flexibilities in their workforce (Atkinson,
1984). Such flexibility involves, adjusting the workforce itself
to changes in demand, hiring to bring in new skills as needed
and presumably implementing layoffs to eliminate redundant
or obsolete skills, as well as relying more on “contingent”
work. Such flexibilities may be achieved in a number of ways
such as multi-skilling, systematic job rotation and constitution
of temporary project teams. Organization with cross-trained
and multi functional workforce allows them to adapt to the
ups and downs of market without work force lay off or
downsizing.
Reward Flexibility
Reward flexibility will mean that the workforce of the
organization will be rewarded for their excellent performance
which will finally lead to better performance for the
organization. Many organizations offer their employees some
sort of reward for excellent performance. Organizations may
change proportion of fixed and variable pay in pay mix of
employees according to product life cycle (Madhani, 2011
a), organizational life cycle (Madhani, 2010 a) and business
life cycle (Madhani, 2010b).
Locational Flexibility
Locational flexibility of the employees will lower the expenses
for the organization. Non core activities of the organizations
can be outsourced. Dell and many other computer hardware,
software as well as financial services organizations in US
have outsourced back end customer services functions to India.Many organizations now use information technology and webbased solutions to create virtual conferences or tele-conferencewhere the employees are at different parts of the world, butattend meetings virtually. This can save the organization ontravel and other organizational overhead costs.
Resource Flexibility
Resource flexibility is the extent to which a resource can beapplied to a larger range of alternative uses, the costs anddifficulty of switching the use of a resource from onealternative use to another and the time required to switch.Individual skill breadth and ability to acquire new skills arestrategic HR indicators of resource flexibility (Wright & Snell,1998).
Research Methodology: Development of a ConceptualFramework and Valuation Models
The contribution of HR practices to organizational flexibilityshould also be included in measurements to provide a soundfoundation for understanding the value-creation and decision-making processes. The organizations with flexible workforcecan react efficiently to any environmental changes. Flexibilityis valuable to organizations as it provides them with the abilityto adapt to changing environment when faced with uncertainty(Kulatilaka & Marks, 1988). Flexibility is created by thoseorganizational capabili t ies that manage uncertaintiesproactively (Kogut & Kulatilaka, 2001).
HR Practices for Dealing with Uncertainties: A Conceptual
Framework
A conceptual framework is developed to identify theuncertainties associated with human assets (Table 2). It alsolists the factors that contribute to uncertainties at theindividual, organizational and market level. Uncertainties ofhuman assets can be related to returns, volume, combinationsand costs as shown in the framework.
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Table 2: Uncertainties Associated with Human Assets: A Conceptual Framework
Sources of UncertaintiesUncertainties
Individual Organization Market1) Uncertainties of return
a) Demand for future
skills
b) Turnover of
employees
c) Skill Obsolescence
d) Lower productivity
e) Lower quality of hire
f) Higher cost of
employee
2) Uncertainties of volumeand combinations
a) Variations in numberof employeesrequired
b) Variations in
c) deploymentof HR assets
3) Uncertainties of
costs
a) Variations intotal employee outlayvis-à-vis cash flow
a) Employee dissatisfaction
b) Lack of commitment
c) Voluntary turnover ofemployee
d) Erosion of existing skills
e) Inability to learn newskills
a) Absenteeism
b) Resistance tochanges in workarrangements
a) Overuse/misuse ofemployee benefits
b) High guaranteed pay/bonuses
a) Changing skill profile ofemployees
b) Mismatch with marketrequirements
c) Turnover of critical skill groupor high profile employees
d) Inability to generate /accommodate new skills andlearning
e) Inability to institutionalizeknowledge
f) Lack of employee, training anddevelopment plan
g) Lack of concern for employeesh) Breach of psychological
contracti) Poor reputation of firm
j) Lower job security
a) Variations in demand fornumber of employees indifferent units / jobs
b) Lack of slack/ buffer
c) High human capitalleverage
a) Variations in profitability
b) High operating leverage
c) High financial leverage
a) Demand fornew skills
b) Uncertaintyregarding availability of new skills
c) Changing careerpatterns
a) Variations indemand
a) Business cyclestages such asrecession /slump
b) Competitivepressures forcost reduction
c) Organization lifecycle stagessuch as maturityor decline
(Source: Developed by author, adapted from Bhattacharya &Wright, 2005)
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Flexibility in strategic decision making is a critical factor for
organizations facing ever- increasing market competition in
the current era of globalization (Madhani, 2008). Boyer et al,
(2003) go to the extent of describing strategic planning as ‘an
exercise in managing flexibility’. Specifically, Bhattacharya
& Wright (2005) saw HR as a strategic asset and set the
conceptual model to consider HR practices as creating ‘real
options’ in terms of reducing the uncertainties of return,
volume, and costs. Specifically, they defined HR options as
“investments in the human capital pool of an organization
that provide the capability to respond to future contingent
events.”
The ability of an organization to use the flexibilities of its
firm specific resources effectively and efficiently over a range
of operating conditions leads to superior outcomes (Sanchez,
2004). Fundamental basis of sustainable superior performance
of a firm is its organizational capability to exploit current
assets and dynamically match its future resources and
capabilities with its surrounding environments. Hence,
organizations must simultaneously focus on the exploitation
of existing assets/opportunities and the exploration of new
opportunities thrown up by environmental uncertainties
(March, 1991). According to Bhattacharya & Gibson (2005),
flexibility of employee skills, employee behaviors and HR
practices represent critical sub dimensions of HR flexibility
and are related to superior performance.
Real options theory are more suitable for handling HR
uncertainty and providing organizational flexibility for two
reasons: First, it highlights the value of flexibility tied to HR
investment and emphasizes that the flexibility to adjust to
changes in the economic environment does add to the NPV of
HR investment. Second, by distinguishing different types of
real options, it helps to identify the relevant types of
flexibility in HRM that may add value to HR investment.
From the different types of real options presented in the
literature (Trigeorgis, 1999), the option to alter operating
scale and the option to abandon or switch use are of interest
for HR managers, as they arguably are both influenced by HR
flexibility. In situations of uncertainty, organization’s
flexibility to be able to adjust to changes in the economic
environment (e.g. to re-organize work or to adjust employment
levels) adds value to HR investment options. According to
investment theory, the value of flexibility is captured by the
concept of ‘real options.’
Valuation Models for Measurement of HR Flexibility
HR flexibility represents the set of HR options and associated
HR practices that enable the organization’s management and
employee to dynamically adapt its knowledge, skills,
resources, capabilities and future operations to a changing
business environment. Many practitioners have recognized
that the NPV and IRR approach could not properly capture
the value of HR flexibility when adapting to emerging
circumstances of an organization in a dynamic environment.
As according to NPV approach, the value of the HR
investment is based on the estimated net cash flows arising
from this HR investment, which are then discounted at a
hurdle rate that reflects the prevailing price of the project’s
risk to get their present value. However, by adopting this
approach when facing HR investment decisions, organizations
do not account for the value of flexibility - sometimes referred
to as “strategic value” that is created when the investment in
HR is made.
Contrary to the logic of NPV, in real life, HR managers are
able to revise and to some extent modify initial HR investment
decisions as more information becomes available and the
uncertainty from the outset of the investment is partially
approaches often result in undervaluing the investment
opportunit ies , which can lead to myopic decisions,
underinvestment, and the eventual loss of one’s competitive
position (Hayes & Gravin, 1982).
To overcome these problems, valuation models have been
developed that measure the ability of organizations to
capitalize on favourable future opportunities (Trigeorgis,
1993). Instead of NPV, a new criterion, expanded NPV
(ENPV) (Trigeorgis, 1995), was conceptualized as shown
below:
Expanded NPV = Direct NPV + Value of Options from
Active Management Decision
Expanded NPV = Direct NPV + Value of Flexibility
This relationship is shown below in Fig. 1. As shown in Fig.
1, expanded NPV goes beyond establishing the traditional
NPV (or static NPV) and includes the value realized by active
decision making in the post investment period, i.e. the value
of real options created by such investment.
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Illustration
To illustrate this concept, let us consider the valuation of anHR investment decision regarding the hiring of work force byan existing organization. Following the NPV approach, allcurrent and future net cash flows from such HR investmentare taken into account, whereas the extended NPV approachadds the value created by the opportunity to launch a newoperational division or reducing outsourcing requirement usingnewly hired men power, or by some other ‘real options’ alsocalled as HR options.
Limitations of Real Options
Extrapolation of the Black-Scholes option pricing model toreal options is filled with problems. Many of the assumptionsthat underlie financial options do not hold in the real optionscontext and scarcity of data makes it more challenging. Dataregarding volatility are difficult to estimate since theunderlying investment opportunities are not traded in themarket place. By their very nature many of these options areof an exploratory nature and historical data about them willnot be available. Many other differences between financialand real options make valuation of real options by Black-Scholes option pricing model make less reliable. However,some of these problems may be handled by alternative rigorousmodels such as Monte Carlo simulation or binomial optionmodels (Copeland & Tufano, 2004), which focus on
mathematical rigour, and to some extent add to vagueness of
the underlying idea. Regardless of this fact, the main advantage
of the real options stays in reshaping the value of strategic
thinking in investment decision making.
Conclusion
HR practices are expected to create and sustain a competitive
advantage and thus to help organizations successfully
accomplish their business goals. Better HR practices in terms
of HR planning, recruitment, training and retention strategies
will effectively respond to external environment. It is
imperative for HR managers to develop methodology for
measuring effectiveness and effectiveness of HR practices.
The problem of measuring and evaluating HR practices in
order to manage them, however, is not new and relates to the
broader issue of valuing intangibles. Measurement of flexibility
offered by HR practices requires some innovative approach
such as ENPV and real options. Such valuation is challenging
because of problematic data gathering, the intangible nature
of HR assets and the lagged effects of HR practices. Still,
there are many benefits of applying real options in HR
practices as explained in this research paper. Even if the real
options framework suggested in this paper does not provide
easy solutions, it still provides a challenging way of thinking
about HR options, their nature and how they contribute to
value creation by enhancing organizational flexibility.
I
I
Flexibility value
Option to defer
NPV = V – I of follow on investment
Option premium
Exp
ande
dN
PV
V
Where,V = Present Value of Expected Cash FlowI = Present Value of Investment Outlays
o
Fig. 1: Real Option Value with Managerial Flexibility
(Source: Developed by author, adapted from Smit & Trigeorgis, 2004)
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Random Walk Behaviour :Indian Equity Market
P K Mishra, Assistant Professor in EconomicsCentral University of Jharkhand, Brambe,Ranchi, India-835205E-mail: [email protected]
Key words: India, Efficient Market Hypothesis, Random Walk Behaviour, Equity Market
he study of the Efficient Market Hypothesis andRandom Walk Theory has attracted the attention ofmarket participants, academicians and researchers
for the last several decades. Eugene Fama was one of theearliest to theorize capital market efficiency as an academicconcept of study through his published dissertation in 1965,but the empirical tests of capital market efficiency had beguneven before that by Louis Bachelier, a French mathematician,in his 1900 dissertation ‘The Theory of Speculation.’ PaulAnthony Samuelson published a proof for a version of theefficient market hypothesis in 1965 and in1970 Famapublished a review of both the theory and the evidence forthe hypothesis. A market is said to be efficient if it respondsimmediately and accurately to all available information. Onthe other hand, the random walk theory asserts that stockprice movements are unpredictable and they follow a randomwalk. Therefore, past stock price movements are of no use topredict future price movements (Fama, 1965). Kendall (1953)suggested that stock prices move randomly. This could be anindication that financial markets operate with high degree ofefficiency (Gitman, Joehnk, and Smart 2011). This means
The main objective of this study is to investigate whether prices in India’s emerging equity market follow a random
walk process as stated by the efficient market hypothesis. Therefore, this study examines the weak-form of market
efficiency in India’s stock market by testing the random walk hypothesis through multi-approaches, specifically unit
root, and runs tests on the daily price of S & P CNX Nifty index of National Stock Exchange over the period from
January 2008 to Mid-March 2013. The empirical results provide the evidence of stationarity indicating that stock
prices do not follow the random walk process.
Abstract
T
P.K. Mishra
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that no investor has a monopolistic access to informationrelevant to price discovery. Therefore, no investor will beable to consistently derive above-average risk-adjusted ratesof return. Keeping in view such implications of efficient markethypothesis and random walk theory, this paper proceeds toempirically their validity in the context of Indian equitymarket.
The rest of the paper is organised as follows: section 2 is anoverview of the India’s equity market; section 3 is an outlookof the efficient market hypothesis and random walk theory;section 4 reviews the existing literature, finds the researchgap and puts forward the research problem; section 5 discussesthe data and methodology of the research; section 6 makesthe analysis; and section 7 concludes.
II. India’s Equity Market
The history of the equity market of India spans 200 years. Itis the oldest in Asia and older than New York stock market.The formal inauguration of the stock exchange at Bombaydates back to 1899. Since then it has been witnessing manybooms and slumps. The second world war of 1939 gave asharp boom which was followed by a slump. As in December1946, there were only 7 stock exchanges in India having 1125listed companies. This scenario radically changed as onDecember 1985 with 14 stock exchanges and 4344 listedcompanies.
In 1991 Indian economy has accepted the norms ofliberalization and globalization. As a consequence it was foundinevitable to lift the Indian stock market trading system atpar with international standards. So, on the basis of therecommendations of High Powered Pherwani Committee, theNational Stock Exchange was incorporated in 1992 by IDBI,ICICI, IFCI, all insurance companies, selected commercialbanks and others. Hitherto, the equity market of India hascaught the attention as an important alternative source offunding for the corporate sector and its role in the process ofoveral l economic development has started assumingimportance.
India’s equity market in 2007 features a developed regulatoryenvironment, a modern market infrastructure, a steadilyincreasing market capitalization and liquidity, better allocationand mobilization of resources, a rapidly developing derivativesmarket, a robust mutual fund industry, and increased issuertransparency. The market capitalization in the year 2007-08is Rs.51, 38,014 Crores. The market capitalization as a
percentage of GDP in India stood at 92% as in June 2008.The number of registered FIIs reached 1403 by June 2008.The number of DEMAT accounts increased to 63, 62, 845 inthe year 2007. The turnover ratio in India increased to 82% in2007 from 20% in 1992. The stock market volatility decreasedto 1.1% in 2007 from 3.3% in 1992. In the derivative segmentof Indian capital market, the annual derivative volumesincreased to $1601billion. Similarly, in the mutual fundsindustry, about 41 mutual fund firms have been trading theirfinancial products. All these cast an emerging and moderncapital market environment in India. Thus, it can be said thatIndia’s equity market is passing through exciting periods bywitnessing a process of ever-increasing globalization andinnovation in the financial markets. This is the period, venturecapital funds and hedge funds have added new dimension tothe market dynamics.
However, such a march did not last long. In 2008, globalfinancial crisis took away India’s market into its grip. Thisyear has been recorded in the world history as a year markedby financial markets turmoil and the wipe out of hundredyear old institutions. Precisely, during 2008-09, Indiansecurities market witnessed a slowdown in line with globalscenario. The primary market witnessed 13.80% down inresource mobilization, and in the secondary market, all stockssaw major corrections in their prices. The mutual fundsindustry withered large scale redemptions and moreimportantly, foreign institutional investors pulled out moneyon a larger extent from the Indian markets.
Despite, Indian economy remained one of the fastest growingeconomies in the world, as it managed to come out of theslowdown, post global financial crisis, during 2009-10. Stockprices recovered during this period in keeping with therecovery in global financial markets. And, Indian economymaintained its position as one of the fastest growing economiesin the world. But the Sovereign debt crisis and prolongedslowdown in the Euro area and the US have begun to havetheir impact on India’s growth prospects, the resilience ofthe Indian economy notwithstanding. In the primary market,the resource mobilized through public and rights issues hasfallen from about Rs.144 billion in the first half of 2011-12 toRs.100 billion during the same period in 2012-13. Thesecondary market has been affected too. While the market-cap to GDP ratio has fallen marginally to 64.3 percent inSeptember 2012 from 65.7 percent a year ago, the averagedaily market turnover during the first half of 2012-13 hasfal len by 9 percent from the level prevail ing in thecorresponding period of 2011-12.
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Amidst these gloomy trends, there were some green shoots in
the securities market. Net FII investment stood at US$ 8.4
billion in the first half of 2012-13 compared to US$ 2.1 billion
in the corresponding period of the previous year. Volatility in
the equity market has fallen as reflected in a decrease in the
volatility of the benchmark index S&P CNX Nifty 50, from
1.4 percent in September 2011 to 0.9 in September 2012. As
per World Bank report, the total number of listed domestic
companies in India is 5112 across 19 stock exchanges.
However, the uncertainty and risk stemming from the slower-
than-desired pace of economic recovery, looming end-of-year
fiscal cliff, and continued economic shockwaves emanating
from Europe make this an especially challenging time for
Indian equity market. Since India is relatively better off than
the rest of the world, Morgan Staley cites Indian stock
markets as an attractive destination even if there are plenty
of headwinds as far as Indian economic fundamentals are
concerned. Morgan Staley believes that the Indian stock market
offers good opportunities in terms of diversification and stock
picking because its corporate fundamentals seem more stable.
All these prepare a strong background why such a topic has
been selected for investigation. India’s sectoral diversification
and low level of volatility seems the best across major
emerging equity markets. As a result more global investors
are keen and keeping an eye on upcoming corporate earnings,
a good reason Indian market is preferred. In this context, it is
highly essential to know whether India’s equity market does
not confirm to random walk behaviour, the research
hypothesis, a good reason why investors and foreign
institutional investors pour easy money into India.
III. Efficient Market Hypothesis and Random WalkBehaviour
An efficient equity market is a market where the share prices
reflect new information accurately and in real time. Equity
market efficiency is judged by its success in incorporating
and inducting information, generally about the basic value of
securit ies, into the price of securit ies. This basic or
fundamental value of securities is the present value of the
cash flows expected in the future by the person owning the
securities. Stocks must be efficiently priced, because if the
securities are priced accurately, then those investors who do
not have time for market analysis would feel confident about
making investments in the capital market.
In finance literature, the Efficient Market Hypothesis (EMH)
asserts that financial markets are ‘informationally efficient.’
That is, one cannot consistently achieve returns in excess ofaverage market returns on a risk-adjusted basis, given theinformation publicly available at the time the investment ismade. There are three major versions of the hypothesis:‘weak,’ ‘semi-strong,’ and ‘strong.’ Weak form EMH claimsthat prices on traded assets (e.g., stocks, bonds, or property)already reflect all past publicly available information. Semi-strong form EMH claims both that prices reflect all publiclyavailable information and that prices instantly change to reflectnew public information. Strong form EMH additionally claimsthat prices instantly reflect even hidden or ‘ insider’information.
The validity of the efficient market hypothesis has beenquestioned by critics who blame the belief in rational marketsfor much of the financial crisis during 2007 and 2010.Defenders of the EMH caution that conflating market stabilitywith the EMH is unwarranted; when publicly availableinformation is unstable, the market can be just as unstable.
EMH allows that when faced with new information, someinvestors may overreact and some may under-react. All thatis required by the EMH is that investors’ reactions be randomand follow a normal distribution pattern so that the net effecton market prices cannot be reliably exploited to make anabnormal profit, especially when considering transaction costs(including commissions and spreads). Thus, any one personcan be wrong about the market – indeed, everyone can be –but the market as a whole is always right.
In weak-form efficiency, future prices cannot be predicted byanalyzing price from the past. Excess returns cannot be earnedin the long run by using investment strategies based onhistorical share prices or other historical data. The tools oftechnical analysis will not be able to consistently produceexcess returns, though some forms of fundamental analysismay still provide excess returns. Share prices exhibit no serialdependencies, meaning that there are no ‘patterns’ to assetprices. This implies that future price movements aredetermined entirely by information not contained in the priceseries. Hence, prices must follow a random walk. This ‘soft’EMH does not require that prices remain at or nearequilibrium, but only that market participants not be able tosystematically profit from market ‘inefficiencies.’ However,while EMH predicts that all price movement (in the absenceof change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency forthe stock markets to trend over time periods of weeks orlonger and that, moreover, there is a positive correlation
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between degree of trending and length of time period studied(but note that over long time periods, the trending is sinusoidalin appearance). Various explanations for such large andapparently non-random price movements have beenpromulgated. But the best explanation seems to be that thedistribution of stock market prices is non-Gaussian (in whichcase EMH, in any of its current forms, would not be strictlyapplicable). The problem of algorithmically constructingprices which reflect all available information has been studiedextensively in the field of machine intelligence. For example,the complexity of finding the arbitrage opportunities in pairbetting markets has been shown to be NP-hard.
IV. Literature Review
There have been an extensive number of empirical researchesinvestigating the weak-form of market efficiency for differentfinancial markets around the world. For instances, severalstudies were performed in the context of developed financialmarkets. Lee (1992) tested the weak-form efficiency for 10industrialized countries (Austria, Belgium, Canada, France,Italy, Japan, the Netherland, Switzerland, U.K. and Germany)using the variance ratio test and the weekly stock returns forthe period 1967-1988. His findings indicate that the RandomWalk Hypothesis (RWH) is not rejected concluding weak-form efficiency for these markets. Also, Choudhry (1994)examined the stochastic trends of individual stock indices inseven OECD countries (U.S., U.K., Canada, France, Germany,Japan and Italy), using Augmented Dickey-Fuller (ADF),KPSS unit root test and Johansen’s cointegration test. Theresults show that these stock markets are efficient during thesample period. On the other hand, Al-Loughani and Chappel(1997) studied the U.K. market using Financial Times StockExchange (FTSE) 30. They conclude that FTSE 30-share indexdoes not follow a random walk. Worthington and Higgs (2006)examined the weak-form market efficiency for twenty-sevenemerging markets. The serial correlation and runs testsconclude that most emerging markets are weak-forminefficient. However, when multiple variance ratio tests areutilized, results were in general consistent with the serialcorrelation and runs tests. Also, Worthington and Higgs (2004)tested twenty European countries from August 1995 to May2003, utilizing serial correlation test, run test, AugmentedDickey-Fuller test and variance ratio test. They found thatonly five countries Germany, Ireland, Portugal, Sweden, andthe U.K. meet the most stringent criteria for random walk,while France, Finland, the Netherland, Norway, and Spainmeet only some requirements for a random walk. Similarly,
Karemera et al. (1999) studied the random walk hypothesisfor fifteen emerging stock markets using monthly index dataexpressed in both U.S. and domestic currencies. They concludethat when utilizing the multiple variance ratios and using theU.S. and domestic currencies, 10 out of 15 emerging stockmarkets are consistent with the random walk hypothesis.
Some other studies related to European emerging equitymarkets were also accomplished. Guidi , Gupta, andMaheshwari (2010) found that stock markets for Central andEastern European countries do not follow a random walk.Similarly, Smith and Ryoo (2003) used the variance ratio teststo examine the RWH for five European emerging equitymarkets. The results indicate that the hypothesis is rejectedfor the markets of Greece, Hungry, Poland, and Portugalbecause returns have auto-correlated errors, in Turkey; theIstanbul stock market follows a random walk. On the otherhand, Hassan et al, (2006) conducted a test of efficiency onseven European emerging markets using data from December1988 through August 2002 and utilizing several methodsincluding Ljung-Box Q statistic, runs and variance ratio tests.Their results, except Greece, Slovakia, and Turkey, marketsin Czech Republic, Hungary, Poland, and Russia are foundunpredictable. Gilmore and McManus (2003) concluded thatthe markets for the Czech Republic, Hungary, and Poland arenot yet weak-form efficient. On the other hand, Abrosimovaet al, (2005) examined the Russian stock market using datafrom September 1995 to May 2001. They concluded thatevidence supports weak-form efficiency in the Russian stockmarket. Also, Borges (2007) studied the Lisbon stock marketfrom January 1993 to December 2006. His results indicatethat the Portuguese stock market index has been approachingrandom walk behaviour since year 2000. Panas (1990) revealsthat Athens stock market is an efficient at the weak-formlevel. This contradicts the results of Dockery and Kavussanos(1996) who investigated the efficiency of the Athens stockmarket (ASM) using roots test. Their findings show that ASMis informationally inefficient. Results on Turkey stockmarkets were mixed. Zychowicz et al, (1995), Antoniou et al,(1997) and Tas and Dursonglu (2005) rejected the randomwalk hypothesis confirming that Istanbul stock exchange (ISE)is weakly inefficient. On the other hand, Buguk and Brorsen(2003) could not reject the random walk hypothesisconcluding that ISE is weak-form efficient.
Several studies also were conducted on some African countriesstock markets. Rapuluchukwu (2010) and Olowe (2002) foundthat Nigerian stock market follows a random walk behaviour
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and is weak-form efficient. On the other hand, Dickinson and
Muragu (1994) tested the Nairobi stock exchange (NSE) usingthe autocorrelation and runs tests. The results support theweak-form efficient market hypothesis implying that NSE isweak-form efficient. Contrary results were obtained byParkinson (1987) where the runs test rejected the RWHindicating that NSE is not weak-form efficient. Akinkugbe(2005) examined the weak-form efficiency in Botswana stockmarket for the period June 1989 to December 2003 using unitroot tests. The results indicate that Botswana market is weak-form efficient. Batuo Enowbi, Guidi, and Mlambo (2009)evaluated the efficient market hypothesis for four Africanstock markets, Egypt, Morocco, South Africa, and Tunisia,utilizing parametric and non parametric tests. Results showthat only South Africa stock market exhibited a random walk.Also, Smith (2008) tested 11 African equity markets from2000-2006 and found that they are not weak-form efficient.Similarly, Jafferis and Smith (2005) tested seven African Stockmarkets, South Africa, Egypt, Morocco, Nigeria, Zimbabwe,Mauritius, and Kenya starting in the early January 1990s andending in June 2001. The results indicate that South Africastock market is weak-form efficient during the entire periodwhile Egypt, Morocco, and Nigeria became weak-formefficient towards the end of the period. Similar study wereconducted by Smith, Jafferis and Ryoo (2002) on eight Africanstock markets using multiple ratio tests. For seven markets,Botswana, Egypt, Kenya, Mauritius, Morocco, Nigeria andZimbabwe, the hypothesis is rejected. However, South Africastock market found to follow a random walk.
Other studies related to Latin American emerging equitymarkets were also performed. For instance, Ojah and Karemera(1999) found that markets for Argentina, Brazil, Chile, andMexico exhibited random walk behaviour and they are weak-form efficient. On the other hand, Grieb and Reyes (1999)utilized the variance ratio tests to examine the equity marketsof Brazil and Mexico. Their findings indicate that Brazilmarket exhibited a greater tendency towards random walk.However, Urrutia (1995) rejected the RWH for the equitymarkets of Argentina, Brazil, Chile, and Mexico when thevariance ratio test was used, while the runs test shows weak-form of efficiency.
The Asian countries stock markets also have been tested forthe weak-form efficiency of the efficient market hypothesis.Hoque, Kim and Pyun (2006) studied the random walk validityfor eight emerging equity markets in Asia including, HongKong, Indonesia, Korea, Malaysia, the Philippines, Singapore,Taiwan and Thailand. They found that stock prices of the
eight Asian countries do not follow a random walk with thepossible exception of Taiwan and Korea. Similarly, Islam andKhaled (2005) and Mobarek and Keasey (2002) rejected theRWH indicating that Dhaka stock market in Bangladesh donot follow a random walk. Also, Abeysekera (2001) reachedthe same conclusion for Colombo stock exchange indicatingthat Sri Lanka stock Market is weak-form inefficient.Mookerjee and Yu (1996) concluded that Shanghai stockexchange and Shenzhen stock exchange in China exhibitedsignificant inefficiencies. Laurence (1986) utilized the runstest and the autocorrelation test on Kuala Lumpur stockexchange and the stock exchange of Singapore. They foundthat both markets are not weak-form efficient. This is contraryto Banes (1986) where he found that Kuala Lumpur stockexchange in Malaysia is weak-form efficient. Similar resultswere reached by Chang et al, (1996) and Chang and Ting(2000) rejecting the RWH and concluding that Taiwan stockmarket is weak-form efficient. Also, Cheung and Coutts(2001) used the variance ratio methods to examine theefficiency of Hang Seng index in Hong Kong covering theperiod from January 1985 to June 1997. Their results confirmthat Hang Seng index follows a RWH. Groenewold (1997)examined the weak form efficiency for Australia and NewZealand covering a full sample period of 1975-1992. Theresults of the unit root tests show that both indices wereconsistent with non-stationary implications of the weak-formof the efficient market hypothesis. The autocorrelation testprovides evidence of return predictability.
Also, several studies were performed on the Middle Easternstock markets. Al-Jafari (2011a) and Al-Jafari (2011b) foundthat both Bahrain and Kuwait equity markets areinformationally inefficient at the weak-form level. On theother hand, Jaradat and Al-Zeaud (2011) found that AmmanStock Exchange (ASE) is inconsistent with the RWH and isnot weak-form efficient. Similar results were obtained byMaghyereh (2003) who found that ASE does not conform torandom walk model and informationally inefficient. Thiscontradicts Civelek (1991) who found that the industrialsector of ASE is weak-form efficient. Also, Awad andDaraghma (2009) concluded that the Palestinian securitiesmarket is inefficient at the weak-form level. On the otherhand, Omran and Farrar (2006) investigated the RWH for fiveMiddle Eastern countries. Their findings rejected the RWHfor all markets. Also, Abdmoulah (2009) tested the weak-form efficiency for 11 Arab stock markets using GARCH-M(1, 1) and found that all markets are weak-form efficient.Similarly, Marasheh and Shrestha (2008) examined the UnitedArab Emirates securities market. They found that data contains
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unit root and follow a random walk meeting the criterion ofweak-form market efficiency. Similar results were obtainedby Mustafa (2004) who concluded that the UAE market isweak-form efficient. Butler and Malaikah (1992) examinedstock returns behaviour in Saudi Arabia and Kuwait during1985-1989. They found that the Saudi stock market isinefficient, while the Kuwaiti stock market is efficient. Thisis contrary to Hassan, Al-Sultan and Al-Saleem (2003) whichthey found that Kuwaiti stock exchange is weak forminefficient. Similarly, Abraham et al, (2002) examined theweak-form efficiency for Bahrain, Saudi Arabia and Kuwaitmarkets using the variance ratio test and the runs test for theperiod October 1992 to December 1998. Results of both testsrejected the RWH in all three markets concluding that theyare weakly inefficient markets.
Studies on market efficiency of equity market in India areonly a few in the finance literature. The studies such as Sharmaand Kennedy (1977), Barua (1980, 1987), Sharma (1983),Ramachandran (1985), Gupta (1985), Srinivasan (1988),Vaidyanathan and Gali (1994) and Prusty (2007) support theweak form efficiency of Indian capital market. There havebeen some studies like Kulkarni (1978), Chaudhury (1991),Poshakwale (1996), Pant and Bishnoi (2002), Pandey (2003),Gupta and Basu (2007), Mishra (2009), Mishra and Pradhan(2009), Mishra (2010), Mishra et al (2011), and Mishra (2011)do not support the existence of weak form efficiency in Indiancapital market. This disagreement regarding the EfficientMarket Hypothesis has generated a research gap and thus,this paper proceeds to reinvestigate the issue in the contextof the India’s equity market for the period Jan 2008 to Mid-March 2013. This sample period has been selected due to thefact that the equity market has shown the volatility behaviourduring this phase due to domestic as well as internationalcontagions.
V. Data and Methodology
The objective of the paper is to examine the validity of theweak form efficient market hypothesis in India’s equity marketfor the sample period spanning from January 2008 to Mid-March 2013. This period has been selected to see the impactof global economic and financial crises and domestic marketslowdowns on the efficient market hypothesis and randomwalk theory. For the purpose, we have used the dataset ofdaily stock returns of India’s equity market based on thedaily adjusted closing values of the S & P CNX Nifty. Thedata have been obtained from the yahoo finance. The seriesconsists of 1284 number of observations. The returns (R
t)
have been calculated by taking a logarithmic difference ofprices of two successive periods. Symbolically, it may bestated as follows: R
t =lnp
t-lnp
t-1where p
t and p
t-1 are the adjusted1
closing prices for the two successive periods. As is evidentfrom the aforesaid review of extant literature, there are severalmethods we can test the efficient market hypothesis andrandom walk theory. We use Run and Unit Root tests in thisstudy.
The Run Test: Run test is the most commonly used non-parametric test of the random walk hypothesis. It does notrequire that return distributions are normally or identicallydistributed (the condition that most stock return statisticscannot satisfy). At the same time, it eliminates the effect ofextreme values often found in the return data. This providesa solid alternative to parametric serial correlation tests inwhich distributions are assumed to be normally distributed.Runs test is a non-parametric test that is designed to examinewhether successive price changes are independent. A run canbe defined as a sequence of consecutive price changes withthe same sign. The non-parametric run test is applicable as atest of randomness for the sequence of returns. Accordingly,it tests whether returns in Indian equity market is predictable.
To perform this test, let na
and nb respectively represent
observations above and below the sample mean/median and rrepresent the observed number of runs with n=n
a+n
b
The expected number of runs can therefore be calculated byemploying the following formula:
The standard error is represented by:
Since returns are not normally distributed, the presence of
structural breaks or outliers in the series can bias the test
results. To control for such issues, we can use in the runs test
mean or median as a base. However, using the median can
yield more reliable results when there are outliers. The null
hypothesis for this test is for temporal independence in theseries.
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Unit Root Tests: Unit root tests are commonly used to testthe stationary property of a time series data. The mostimportant unit root tests are Augmented Dickey-Fuller(ADF), the Phillips-Perron (PP) and the Kwiatkowski,Phillips, Schmidt and Shin (KPSS) tests.
ADF Test: Dickey and Fuller (1979) have developed a test,known as Augmented Dickey -Fuller (ADF) test. The testconsists of estimating the following regression:
Where, Δ Rt is the first difference of the R
t,β
1 is the intercept,
β2,
ρ are the coefficients, t is the time or trend variable, m isthe number of lagged terms chosen to ensure that ε
1 is white
noise, i.e. ε1 contains no autocorrelation; ε
1 is the pure white
noise error term, is the sum of the lagged values of
the dependent variable ΔRt . Using the above equation, the
null hypothesis (H0) of a unit root is ρ=0 which is tested
against the alternative hypothesis (H1) that ρ<0 . The
acceptance of null hypothesis implies the existence of a unitroot, which means the time series under consideration, is non-stat ionary thereby indicat ing that the market showscharacteristics of random walk and as such is efficient in theweak form. The rejection of null hypothesis implies the non-existence of a unit root which means the time series R
1 is
stationary and do not show characteristics of random walk.And, hence is not weak form efficient.
PP Test: Phillips and Perron (1988) suggested a non-parametric method of testing for a unit root. The PP methodestimates the following equation:
Where, Rt is the monthly compounded rate of return calculated
on the basis of BSE and NSE monthly stock price indices, x1
are optional exogenous regressors which may consist of
constant, or a constant and trend, ρ and δ are parameters to be
estimated, and, ετ are assumed to be white noise. The null
and alternative hypotheses of this test are H0 : α = 0 and
H1 : α < 0 . The null hypothesis that the time series is non-
stationary is rejected when test statistic is more negative than
the critical value at a given level of significance.
KPSS Test: This test was developed by Kwiatkowski, Phillips,
Schmidt and Shin in 1992. The KPSS test assumes trend-
stationary time Rt under the null hypothesis. The KPSS
statistic is based on the residuals from the OLS regression
Rtof on the exogenous variables: x
t: R
T=x’
tδ +u
t
The KPSS attempts to test the null hypothesis that series is
stationarity against the alternative hypothesis of non-
stationarity. And, this null hypothesis is accepted if the test
statistic is less than the critical value; otherwise rejected.
VI. Preliminary Analysis
In order to obtain a better understanding of the behaviour of
stock prices/returns, a preliminary analysis of the data has
been carried out and results are reported in the Figure-1 and
Table-1. The figure-1 shows the time series plot of the return
data based on the Nifty index covering the aforesaid period.
It is clear from this plot that the data exhibit strong volatility.
It is evident from the Fig.1 that from the second quarter of
2008 till the end of first quarter of 2009 shows greater degree
of volatility of Indian stock market due to the impact of
global financial slowdown. Furthermore, during the fourth
quarter of 2010 and till the end of second quarter of 2012 the
market remained volatile, especially due to the impact of Euro
Zone economic crisis. Since then it has been showing a bit
stable and increase in stock market activities.
Mean -0.076669
Median -0.006373
Maximum 0.163343
Minimum -0.877269
Std. Dev. 0.160404
Skewness -2.822339
Kurtosis 11.70832
Jarque-Bera 5761.802
Probability 0.000000
Descriptive Statistics Nifty Based Daily Return
Table 1: Descriptive Statistics of Nifty Based Daily Return
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The Table-1 summarizes the descriptive statistics of the Niftybased daily return series. The distribution is not normal asskewness is less than one and the kurtosis is above three.Jarque-Bera statistic is 5761.8 and the probability of obtainingsuch a result under the normality assumption is zero. Thus,it rejects the null hypothesis that the series is normallydistributed. Thus, the stock price index, i.e., S & P CNXNifty does not follow the random walk. Thus Indian capitalmarket is not efficient in weak-form of Efficient MarketHypothesis.
VII. Empirical Analysis
Figure 1: TS Plot of Adjusted Daily Closing S & P CNX Nifty Index
In order to test the random walk behaviour and efficiency ofIndia’s equity market, we have used the Runs test and theUnit root test. The results are presented in Table-2, 3 & 4.
The Results of the Runs Test: The positive Z indicates thatthere are too many runs in the sample which suggest negativeserial correlation or autocorrelation. In our case, there are toomany runs in the sample with zero observed level ofsignificance. Thus, the null hypothesis that Nifty based dailyreturn series is random, is clearly rejected. In other words,the runs test clearly shows that India’s equity market is weak-form inefficient.
Test Value(a) -0.0766689
Cases < Test Value 356
Cases ≥ Test Value 928
Total Cases 1284
Number of Runs 709
Z 13.476
Asymp. Sig. (2-tailed) 0,000
Run Test Nifty Based Daily Return
Table 2: Runs Test with Mean as the Base
Table 3: Runs Test with Median as the Base
Test Value(a) -0.00637Cases < Test Value 642Cases ≥ Test Value 642Total Cases 1284Number of Runs 771Z 7.147Asymp. Sig. (2-tailed) 0
Run Test Nifty Based Daily Return
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The Test Results of Unit Root Test: The results of unit roottests are presented in Table-4. The ADF, PP and KPSS testshave been performed in level form with intercept and inter-cept & trend. All these tests reject the null hypotheses. TheADF and PP tests reject the null hypothesis of existence ofunit root. It means the Nifty based daily stock return series
is stationary and does not show the features of random walk;hence the India’s equity market is not efficient in weak form.Furthermore, the KPSS test accepts the null hypothesis thatthe series is stationary. This is the confirmation that the In-dia’s equity market does not show the random walk behav-iour and is not efficient in weak form.
ADF with Intercept -19.68 -3.43 Reject the Null Hypothesis
ADF with Trend and Intercept -19.72 -3.96 Reject the Null Hypothesis
Type of Test PP Statistic Critical Values at 1% Inference
ADF with Intercept -895.96 -3.43 Reject the Null Hypothesis
ADF with Trend and Intercept -902.9 -3.96 Reject the Null Hypothesis
Type of Test KPSS Statisticc Critical Values at 1% Inference
ADF with Intercept 0.5 0.73 Accept the Null Hypothesis
ADF with Trend and Intercept 0.5 0.21 Accept the Null Hypothesis
Table 4: Results of Unit Roots Tests
Type of Test at 1st Difference ADF Statistic Critical Values at 1% Inference
VIII. Conclusion
In recent years, the equity markets of developed and
developing countries are passing through a critical phase of
relatively high volatility and low liquidity thereby generating
the forces of market risk. And, India is no exception. The US
sub-prime crisis of 2008 and most recent Euro zone debt
crisis have wobbled the India’s equity market. In this context,
it is highly essential that the random walk behaviour and
efficiency in the information flow in India’s equity market
should be tested. Thus, the paper examined the random walk
behaviour and efficiency of the Indian equity market using
run test, and unit root tests. All these tests imply that the
Indian equity market does not follow random walk behaviour
and also, indicate that it is informationally inefficient at the
weak-form level. So in Indian market, it may be possible to
realize abnormal returns by using historical sequences of stock
prices, data related to trading volume, and other market related
information.
Such finding is no surprise in case of India. Despite the reforms
in the market structure, trading and regulations, Indian capital
market does not show efficiency in the flow of information of
any kind that may allow the market participants to make
some abnormal gains. Therefore, to some extent they can beat
the market thereby making excess returns. Such type of
behaviour shows the predictability of Indian capital market
and exposes to global contagions. Particularly, the FIIs have
become the primary movers and shakers of Indian equity
market as at least observed in last 2-3 years. This not only
adversely affects the confidence level of domestic investors,
but poses the potential threat to the capital formation of the
nation in general and the growth of Industries in particular.
Hence, it is imperative that the Indian regulators and policy
makers should embark on strong financial supervision, better
accounting, fair disclosure norms, reliable information
gathering and reporting, and corporate governance.
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Key words: Management Accounting, ERP, Benefits, Accountants, IT professionals, Satisfaction, India.
Mahesha V. M.Com., Assistant ProfessorDepartment of Post Graduate Studies and Research inCommerce, Karnataka State Open UniversityMuktagangotri, Mysore – 570006. Karnataka, India.Email:- [email protected].
Dr. S.B. Akash, Associate Professor & Chairman Dept. of Postgraduate studies & Research in Commerce Rani ChannammaUniversity
Management Accounting Benefits:
ERP EnvironmentMahesha V. and Akash S.B.
reat competition in the area of trade and theemergence of globalization compel companies toemploy the technology used by their competitors
to survive; therefore we are facing with an increasing trend inthe use of these technologies. One of the latest informationtechnologies used by the organization is Enterprise ResourcePlanning (ERP). ERP systems have been recognized as themost important development in the corporate use ofinformation technology since 1990 (Davenport, 1998),promising seamless integration of all the information flowsthroughout a firm. ERP system enables organizations to collectavailable information in all areas of activity in an integratedand coherent way and provide this data and the resultsobtained from them to its users at various organizational levels.One of the main users of this information is managementaccountants. Burns and Vaivo (2001, 389-390) identified fourparticular roles in their summary of literature on the changing
Abstract
The principal aim of this study is to investigate the accounting benefits of the adoption of an ERP system in relation to
ERR user satisfaction. This study explores the impact of the ERP system on accounting information and practice. This
study also examines whether differences exist between accountants and IT professionals concerning how each group assesses
ERP accounting benefits and ERP user satisfaction. The participants of this study consist of 75 accountants and 130 IT
professionals from 48 companies in India. The empirical evidence confirms a number of accounting benefits derived from
ERP systems particularly for accounting process. Furthermore, this research identifies factors related to accounting which
affect the level of ERP user satisfaction. The results of this study will provide stimulus for consequent research in the field.
G
,
SCMS Journal o f Indian Management , July - September, 2013 68
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role of management accountants – the provider of costinformation, the controller/scorekeeper, the internal businessconsultant providing business support and the member of thestrategic management team. Management Accountants areconstantly trying to solve problems and direct managers usingthe integrated information provided by this system as well astheir competitors’ strategic financial and non-financialinformation. Due to the upward trend of using ERP systemsand its introduction into Iranian organizations, in this studywe review and evaluate the role of accountants in theimplementation of Enterprise Resource Planning system. Theresults suggest that the accountants have apposite role in theimplementation of ERP.
Recent changes in the business environments which have takenplace under various titles such as removal of unnecessaryregulations, privatization and globalization have prepared thegrounds for the evolution of existing firms into largemultinational companies and have compelled the companiesto search for new strategies in order to survive and furthercontinue the success. On the other hand it is observed thatinformation and communication technology (ICT) not onlyhave influenced and revolutionized the information systemsbut also have a significant effect on the way activities oforganizations are performed. So it seems that this technologycan provide conditions which enable companies to reflectagainst the created environmental changes and as a result leadto developments. However, in new business environmentswhich are based on ICT, in order to keep their usedtechnologies up-to-date and hence maintain their competitivecapacity, companies are under increasing pressures. ERPsystem is an instance of such technologies different types ofwhich (such as Sap, Ban, JD Edwards and, Oracle) areavailable, to the users.
ERP and Management Accounting Benefits
Information technology (IT) has brought about many changesin recent years. Companies have begun to adopt enterpriseresource planning (ERP) systems, which integrate severalbusiness procedures/departments while sharing one database(Rom and Rohde, 2006). The emergence of enterprise resourceplanning systems has signified the beginning of a new era inthe business environment, where companies can integratebusiness processes/applications and respond to real-timeinformation (Stefanou, 2002; Nicolaou, 2003; Spathis, 2006).This has resulted in the replacement of a major number ofinformation systems (IS) by one single ERP system. ERPsystems have significantly changed the way business data iscollected, stored, disseminated and used. This change in
information processing orientation affects the accountingprocess (Sutton, 2006). Nevertheless, the focus of the relevantliterature has been on ERP systems in general and there isl imited published scientif ic evidence on the ERPimplementation processes and their effects on accounting inparticular (Granlund and Malmi, 2002; Sutton, 2006). Nicolaouand Bhattacharya (2008) pointed out that “firms whichimplement an ERP system must be conscious of andcircumspect enough to realize that ERPs are different fromother IT systems. They bring about global changes to firms’business processes and as such their deployment presentsnot a finale but the start of post-implementation activities.”Overall, it seems that there is a positive relationship betweenERP implementation and operational efficiencies (Matolscyet al, 2005; Nicolaou and Bhattacharya, 2008).
According to recent studies, the implementation of ERPsystems affects the accounting processes and the accountants’role (Granlund and Malmi, 2002; Scapens and Jazayeri, 2003).Booth et al (2000) examined to which extent the applicationof an ERP system can lead to the adoption of new accountingpractices by an enterprise. It was found that ERP systemsconstitute sources of data for new accounting practices andare able to support these practices. More specifically, Romand Rohde (2006) found that ERP systems seem to be ofassistance in terms of the collection of data and theorganizational breadth of management accounting. This wasfurther confirmed by Javernpaa (2007), who noted that suchsystems lead to the adoption of new management accountingpractices and accountants are able to carry out routineactivities more effectively, to handle large databases morequickly and to report in a faster and more flexible way. Thefindings of another study (Hyvïnen et al, 2008) whichpresented the development of a management accountingcontrol system, suggested that IT accounting solutions ingeneral force accountants to not only study the logic of thesolution, but also to invent ways of combining accountingand management rationalities. Newman and Westrup (2005)also, using empirical evidence, demonstrated that even thoughthe relationship of accountants and technologies such as ERPshas become increasingly intertwined, accountants continueto use their position to reshape and advance their professionalexpertise. As a conclusion, we are in the position to arguethat ERP systems have impact on the accounting processesand on the accountants’ role.
In a study by Shang and Seddon (2002), a comprehensiveframework for assessing the benefits derived from ERPsystems is proposed. This framework tries to classify ERPbenefits into five dimensions: operational, managerial,
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strategic, IT infrastructure, and organizational. Esteves (2009)based on this classification in order to develop a benefitsrealization road-map for ERP usage in the context of smalland medium-sized enterprises (SMEs). His analysis suggeststhat ERP benefits realization dimensions are interconnectedand that managers should perceive this realization as acontinuum cycle along the ERP post implementation period.Some of the benefits that were examined by Esteves (2009)were: cycle t ime reduction, cost reduction, quali tyimprovement, improved decision making, supportorganizational changes, increase IT infrastructure capabilityand business flexibility.
Differences in perspectives related to ERP performance
We will now take a look at research studies which tried toexamine differences in perspectives related to ERPperformance between different groups of users. Chang (2006)compared IS integration in high-tech organizations from theIT and general management perspectives. All the organizationsthat participated in the study had implemented an ERP system.The results showed that IT and general managementperceptions of IS implementation were very similar.Furthermore, ITs’ overall important assessments of businessfunctions were more strongly correlated with their overalllevel of implementation and they tended to rate systembenefits and system reliability more highly. Sayed (2006)focused on the mechanisms and dynamics of expertiseconstitution where it is understood as an accomplishment orachievement. He tried to study the interrelation of accountantsand ICTs in a modern technology environment. He found thatthere is no dilution of expertise in relation to ICTs. Rather,some accountants are promoting themselves as a group ofrelevant experts in deriving benefits from these systems. Theresults of this study indicate that accountants see ERPs as achance for them to expand their skills and knowledge. Theobjective of another study was to determine whetherdifferences exist in perceptions related to ERP performancebetween two organizational stakeholder groups: businessmanagers and IT professionals. The results indicated that nosignificant statistical differences exist between the two groupswith the exception of one dimension: ERP success, i.e. vendor/consultant quality. Holsapple et al (2006) tried to determineERP success, in terms of user characteristics, ERP fitnessfactors and user satisfaction. This study indicated that ERPuser satisfaction among management users was greater thanamong non-management users. Longinidis and Gotzamani(2009) also, found that users from network department areless satisfied with ERP than are users from other departments(sales and supportive). In their study they stated that ERP
users from different departments use different functionalmodules and interact with different interfaces of the mainERP system. Although previous studies have examineddifferences in perceptions concerning benefits and usersatisfaction, there are no academic studies that assess anydifferences in the perceptions between accountants and ITsparticularly in terms of accounting benefits and ERPsatisfaction level related to ERP performance. Thus, our studywhich invest igates the accounting benefi ts and usersatisfaction associated with the ERP application by theaccounting department of an enterprise, is based on empiricallyresearched evidence.
ERP and user satisfaction
In the literature there are studies which tried to assess usersatisfaction related to ERP performance and operation.Somers et al (2003) argue that the realization of benefits fromERP systems depends on supporting effective use ofinformation technology and the satisfaction of IT users. Theynote that user satisfaction with information systems is oneof the most important determinants of the success of thosesystems. Wu and Wang (2007) agree that user satisfaction isan evaluation mechanism for determining system success andthus their study looked at key user satisfaction as a means ofdetermining system success. Their study took place in Taiwanand 205 questionnaires were completed by key users of ERPsystems in a large number of companies. The results indicatedthat there is a relationship between key user satisfaction andperceived system success. Their research identified that user’ssatisfaction evaluation for ERP system is multidimensionaland is related to “ERP product,” “contractor service” and“knowledge and involvement.” Longinidis and Gotzamani(2009) also, identified three factors which seem to affectsatisfaction of ERP users: Interaction with the IT department,Pre-implementat ion processes and ERP product andadaptability.
Calisir and Calisir (2004) claim that while much money hasbeen spent on the implementation of ERP systems, previousresearch has demonstrated that potential users may not usethem. They conducted a survey, which aimed at examiningvarious usability factors affecting end-user satisfaction withERP systems. Data were gathered from 51 end users in 24companies. The results showed that perceived usefulness aswell as learnability are determinants of enduser satisfactionwith ERP systems. Additionally, perceived ease of use andsystem capability affect perceived usefulness, while users’guidance influences both perceived usefulness and learnability.
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Koh et al (2006) investigated ERP adoption by Greekcompanies and explored the effects of uncertainty on theperformance of these systems through six case studies. Theyfound that there were major differences between ERP adoptionin Greek companies and companies in other countries. InGreece, the internal enterprise’s culture, resources available,skills of employees and the way ERP systems were perceived,treated and integrated within the enterprise and in the supplychain play a critical role in determining the success / failure ofthe adoption of ERP systems.
Methodology
A quantitative approach was adopted in terms of the collectionand analysis of the data. Using a probability sample design,systematic sampling was applied and a sample of 164companies in India was drawn that had adopted an ERPsystem. After liaising with the employees in charge of
accounting and ERP systems in those companies, the finalsample was reduced to 48 companies (those that agreed totake part in the study). The participants were 75 accountantsand 130 IT professionals. All the companies that participatedin the survey implemented an enterprise system at least oneyear ago. The data were gathered with the questionnairemethod. The questionnaire forms were returned to us by faxor e-mail and some were completed in person. Responsesrange from ‘‘not at all’’ (1) to ‘‘perfect’’ (7) on a 7-pointLikert type scale. Previous studies have indicated satisfactoryreliability for these variables (Spathis and Constantinides,2004; Spathis, 2006). The tests such as á-Cronbach and factoranalysis have been taken to ensure the reliability and validityof the scale obtained. The study used t-test to measure anystatistically significant differences in the responses betweenaccountants and IT professionals and we also used regressionanalysis to identify relationships between satisfaction andindependent variables.
Table – 1: Demographic Characteristics
A. RespondentsPosition held in the FirmAccounting 75 36.58IT (ERP) 130 63.41Total 205 100GenderMale 153 74.63Female 52 25.36Total 205 100Age (in years)25 to 35 years 66 32.1936 to 45 years 84 40.97Above 45 years 55 26.82Total 205 100Work Experience (in years)1 to 4 years 72 35.124 to 6 years 48 23.41Above 6 years 85 41.46Total 205 100
B. CompaniesType of IndustryManufacture 21 43.75Service - Research and Development 11 22.91Commerce 16 33.33Total 48 100
C. ERPType of ERPIndian ERP Software (A1 ERP, Adaxa Suite,Adempiere, Compiere, ERPNEXT etc.,) 31 64.5
Not Indian ERP Software (SAP,NAVISION, JD EDWARDS, etc.)Total 17 35.41
48 100.00
Particulars Response Percentage (%)
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The empirical evidence presented in this study was solelyobtained via the questionnaire that was answered byemployees from companies that had adopted the ERP systemfor at least 1 year in India. As can be seen in Table 1,accountants constituted 36.58% of the sample, while ITsconstituted 63.41% of the sample. The mean age of therespondents was 40.1 years and the respondents’ mean totalwork experience was 15.6 years. The mean years at currentposition was 8.4 years. According to the “type of industry,”43.75 %of the companies were from the manufacturing sector,22.91% were from the service sector and 33.33% were from
the commerce sector. Moving on to the “type of ERP”, itwas decided to divide the ERP software packages into twomain categories: “Local- Indian ERP software packages” (suchas A1 ERP, Adaxa Suite, Adempiere, Compiere, ERPNEXTetc.) and “International ERP software packages” (such as SAPERP, NAVISION ERP (MICROSOFT), JD EDWARDS ERP,etc.). 64.50% of the companies that participated in the studyhad adopted a local ERP system. It seems that companieswhich operate in India, tend to adopt local software packages.Further information on demographic characteristics isprovided in Table 1.
Table 2. Validity and reliability analysis of ERP system accounting benefits
ERP system accounting benefits Factor loadings % of variance
Reduction of personnel of accounting department 0.902
Total variance explained (%) 66.338
Prior to the presentation of the research findings, we wouldlike to refer to the modules that the companies operate in theERP environment, Almost all companies that participated inthe study operated the f inancial accounting module.Additionally, the majority of the companies operated stockpurchases, a fixed asset register, costing, sales-marketing and
management accounting modules. The operation of suchmodules demonstrates that the companies that operate anERP have a primary concern to integrate their accountingprocesses into that system. This is due to their expectationthat ERP will have a positive impact on their accountingprocesses. Paradoxically, the payroll module, which forms an
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integral part of the accounting system, is only operated by57.5 percent of the companies that participated in the study.The survey findings are divided into three main sections andeach section corresponds to a specific research question. Thefirst section explores the accounting benefits derived fromthe ERP system implementation. The second section providesinformation about the opinions of both accountants and ITpersonnel and discusses whether or not there are statisticallysignificant differences concerning how each group measuresaccounting benefits and ERP user satisfaction. In the lastsection we try to examine ERP user satisfaction in relation toaccounting benefits, modules implemented and ERP cost.Empirical evidence showed that the respondents have quoteda number of benefits in accounting practice derived from ERPsystems. The variables related to accounting benefits of ERPsystems were factor analyzed using principal componentanalysis (PCA) with varimax rotation as a commonly usedtechnique for summarizing a set of variables into independentsubsets. The results are presented in Table 2.
PCA highlighted five dimensions (named after Shang and
Seddon’s (2002) and Spathis (2006) classification) involving:
1. IT accounting benefits: ERP gathers data more quickly
and easier, ERP produces results more quickly and easier.
2. Operational accounting benefits (time): reduction of time
for closure of monthly, quarterly and annual accounts
and reduction of time for issuing financial statements.
The next section presents results about the perceptions ofaccountants and IT professionals concerning accountingbenefits and ERP user satisfaction level. Details are displayedin Table 3. Respondents have quoted a number of benefitsand advantages in accounting information and practice derivedfrom ERP systems. The most highly-rated perceived benefitsachieved following ERP implementation involve: ITaccounting benefits, organizational accounting benefits andoperational accounting benefits (time). Each of the aboveperceived benefits was given a mean score between “5 = highdegree” and “6 = very high degree” by the respondents. Suchfindings prove that the inclusion of accounting processes inthe ERP system lead to the emergence of various accountingbenefits that receive high scores. “Managerial accounting
benefits” also received a high score “mean = 4.649 = highdegree.” On the other hand, the variable “operationalaccounting benefits (cost)” is the benefit that received thelowest rating (mean = 2.39 = very low degree). It seems thatERP adoption in the accounting department does not have animportant effect on personnel reduction. This finding is alsoconsistent with the results of O’Leary (2004), who foundthat only 12% of the companies which participated in hisstudy and had implemented an ERP system, had also seen areduction of personnel due to this implementation. There areno statistically significant differences concerning themeasurement of the accounting benefits between accountantsand IT professionals. It seems that the respondents of ourstudy (both accountants and ITs) viewed ERP as beneficial
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for the accounting processes in their organizations. However,it seems that there is a statistically significant differenceconcerning ERP user satisfaction in the way that accountantsand ITs estimate this variable (t = -2.046, p < 0.042). Eventhough accountants and IT professionals rated ERP user
satisfaction highly, the results show that there is a statistically
significant difference in their perceptions concerning this
variable. Overall, accountants seem to be more satisfied with
The last research question concerns satisfaction of ERPadoption and its relation to accounting benefits, number ofmodules implemented and ERP cost. As shown in Table 4,the mean of the perceived ERP user satisfaction is 5.240. Theaverage number of modules implemented is almost seven outof eleven and the average cost of ERP is 2.432% of annualsales. The mean of perceived IT accounting benefits is 5.640,the mean of perceived operational accounting benefits (time)is 5.052, the mean of perceived organizational accountingbenefits is 5.354, the mean of perceived managerial accountingbenefits is 4.649 and the mean of perceived operationalaccounting benefits (cost) is 2.390. Statistically significantcorrelations exist between the dependent variable “ERP usersatisfaction” and the independent variables “IT accountingbenefi ts ,” “operat ional accounting benefi ts ( t ime),”“organizational accounting benefits,” “managerial accountingbenefits,” and “ERP cost.” These findings further confirmthe strong link between these variables within this context.However, perceived “operational accounting benefits (cost)”and “modules” are not correlated with “ERP user satisfaction.”
Conclusion
The aim of the present study was to investigate the accountingbenefits derived from ERP application in the accounting
department and whether differences between accountants andIT professionals exist concerning the measurement ofaccounting benefits and ERP user satisfaction. Moreover, thisstudy tried to evaluate the effect of accounting benefits,number of modules implemented and ERP cost on ERP usersatisfaction. Companies that operate in India and haveadopted an ERP system provided the data presented here.This study explored the impact that the ERP system has hadon accounting information and practice. The studies conductedby Spathis and Constantinides (2004), Spathis (2006) andKanellou and Spathis (2007) explored the accounting benefitsof adopting enterprise systems in India and this study can beseen as an extension of those studies, as it also explored ERPuser satisfaction and its relation to accounting benefits. Thus,the study is currently one of the first complete sets of dataavailable on Enterprise Resource Planning Systems in Indiain relation not only to benefits but also to ERP usersatisfaction.
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C.H.Gowthami, Assistant Professor,ITM Business School, Warangal-506001, A.PPh: +919849789131
Household Income :On Potential EntrepreneurPurna Prabhakar Nandamuri and C.H.Gowthami
revailing over the menace of unemployment hasbeen a target for the policy makers as well as theimplementers. One of the futuristic options available
is creat ing opportunit ies of self-employment orentrepreneurship. One can create opportunities for his/herselfand become an earning source by opting entrepreneurship asa career. Alam (2009) noted that entrepreneurship is like anengine for the development of the economy, creation of jobsand social adjustment of the economies of developing nations.The tempo and advancement of an economic system largelydepends on the emergence of new generation entrepreneurs. Asurvey of Mckinsey and NASCOM estimates that 110 to130 million Indians will be searching for jobs by 2015 (Popli,2010). Policymakers and academics around the globe agreethat the role and pace of entrepreneurship is significant forthe development of society. Hence, fostering entrepreneurialawareness and positive attitudes towards entrepreneurship
Abstract
The advancement of an economic system depends on the emergence of new generation entrepreneurs. It is appropriate to spot
out the influence of the fundamental socio-demographic factors on entrepreneurial orientation. The purpose of this study is
to analyze the association of household income with entrepre3neurial resourcefulness of management students. A sample of
200 final year post-graduate management students, selected randomly from 20 management institutes, were served with a
structured questionnaire to be marked on a five-point scale The responses were tested with ANOVA and multiple comparisons
were made and the relevant box plots were derived for inter-group comparison with the help of SPSS-19. The findings
establish that household income had a profound impact on entrepreneurial resourcefulness.
P
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are high on the policy agenda of several economies (OECD,2010). At the same t ime what one understandsentrepreneurship to be is not always viewed equally and thishinders making fact-based policy (GEM, 2011). The idea isthat, for individuals, nascent attitudes and perceptions aboutentrepreneurship affects those planning to venture into.Hence, it is the obligation on the prevailing education system,apart from the other institutions existing, to charge thegraduating youth with entrepreneurial orientation.
Researchers have identif ied various determinants ofentrepreneurship. As per the Global EntrepreneurshipMonitor - 2002 report, around 12% of adult population wasinvolved in entrepreneurial activities among 37 countriesrepresenting 62% of the world population. While less than3% of adults were involved in entrepreneurial endeavors inJapan, Russia and Belgium, more than 18% were so engagedin India and Thailand. Thus the level of entrepreneurialactivity was observed to be the highest in the developingAsian countries. The salience of entrepreneurship in Indiahas been intensifying in recent times. The percentage ofentrepreneurial activity in India was 17.9%, as compared toUnited States-10.5%; UK-5.4%; and Japan-1.8% (GEM,2002). In a recent survey by the Deloitte group, India ranks2nd globally as home to the fastest growing technology firms.In a survey conducted by the National Knowledge Commission,of the 95% who valued education as a foundation forentrepreneurship, 53% consider education a key trigger toevoke entrepreneurial orientat ion (NKC, 2008).Entrepreneurial orientation refers to the processes, practices,and decision-making activities that lead to new entry(Lumpkin & Dess, 1996). Entrepreneurship is a process ofopportunity identification and the creation of an organizationto exploit the opportunity. Entrepreneurial behaviour isdefined as the constellation of functions, activities and actionsinvolved in the perception of opportunities and the creationof organizations. An emergent body of research seeks to spotout fundamental factors that motivate individuals towardsentrepreneurial activity. Some of these factors relate to specificindividual differences in family background, education, age,sex, or personal attributes (Zhao et al, 2005). It is not onlythe skills but also some other factors like family background,personal characteristics, entrepreneurial support, socialrecognition, and risk-taking capability that matter in nurturinga successful entrepreneur.
Factors affecting entrepreneurship can be grouped under fourmain headings; demographic factors, social factors,
psychological factors and external factors outside of them.The contents of demographic/personal factors are age, maritalstatus, gender, income level and education. Social factors canbe considered as culture and society, family and religious values(Stephen, 1998). Previous research shows that entrepreneurshave the ability to act quickly during the emergence of newopportunities, and that there is an important relationshipbetween the capabilities of the entrepreneur and the activities(Hardy, 1999). In terms of individual approach, demographicvariables have an important role in being entrepreneurial. Inaddition, many factors such as age, marital status, socio-economic status, individual background and family incomeaffect being entrepreneurial (Coulter, 2001). However, fromthe review of the earlier researches, it can be concluded thatentrepreneurial characteristics are not universal. There is noprecise regulation or a set of traits independent acrosssituations to guide the entrepreneur to success. Psychologicalcharacteristics like ability to take risk and desire to besuccessful stand against common apprehensions associatedwith entrepreneurial success. Socio-Economic features likecaste, parental background, technical and professionaleducation, financial backup, location advantage and easy accessto market are also found to have strong correlation withentrepreneurial success (Azhar, 1999).
Entrepreneurial Resourcefulness
Being resourceful is the key to becoming a successfulentrepreneur. Resourcefulness is an important heuristic thatextends beyond other cognitive constructs such as self-efficacy and awareness. Both research and practice suggestthat resourcefulness as a construct has cognitive, affective,and behavioural components that allow it draw from ‘the toolbag’ of other skills. Resourcefulness offers the field ofentrepreneurship a rich construct that combines not only thecreative use of financial resources, but also numerous non-financial resources that lead to firm survival and firmperformance (Bradley & Mitchell, 2005). Entrepreneurialresourcefulness refers to the ability to self-regulate and directone’s behaviour to successfully cope with difficult, stressfuland challenging si tuat ions (Meichenbaum, 1977).Entrepreneurial resourcefulness comprises three genericcompetencies - cognitive, affective and action-oriented(Kanungo & Misra, 1992). Entrepreneurial behaviour is afunction of entrepreneurial resourcefulness. Sasi and Sendil(2000) argue that by hypothesizing that entrepreneurialresourcefulness influences entrepreneurial behaviour, thepredictive power can be enhanced. Min (1999) includes
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creativity, visionary, optimistic and innovator in the top tenattributes that entrepreneurs share. Gartner (1990) andSaayman et al (2008) also support the importance ofinnovation in entrepreneurship. Drucker (2002) says that allthe entrepreneurs he has ever met have ‘a commitment to thesystematic practice of innovation.’ Levitt (2002) argued thatcreativity may be ‘more of a millstone than a milestone’because of the shortage of creative people in business.According to Russell and Faulkner (2004), it is through timesof upheaval that entrepreneurs are often resourceful byspotting opportunities in the environment and using theircreativity to bring about innovation. Thus, all the findingssuggest resourcefulness as a key attribute for an entrepreneur.
However, the nature of the relat ionship betweenentrepreneurial resourcefulness and other relevant factors inentrepreneurship has not been made explicit or empiricallytestable to date. As entrepreneurial orientation theories haveemerged primarily from research among the developedcountries, it is vital to observe the scope to which these applyin the milieu of developing countries such as India where thepolicy makers are looking upon the under-25 population asthe future pool of entrepreneurs and employment originators.The purpose of this study is to verify the extent of theinfluence of the factor of household income on entrepreneurialresourcefulness of management students and to suggestreforms to the curriculum of entrepreneurial education.
Household Income
Financial wealth provides another important precursor ofentrepreneurial growth aspirations. High-income householdsare not only able to better provide the necessary financialresources to fuel entrepreneurial firm growth, but high-incomehouseholds are, because of their social position, more likelyto see more entrepreneurial growth opportunities (Dunn &Holtz, 2000). Exogenous influences, like demographics,society, traits, financial support, and culture, affect theattitudes and also the intentions indirectly and behaviours tobecome entrepreneurs (Shapero & Sokol, 1982). Out of theexogenous factors family support is one of the most importantas it proves to be backup of the entrepreneur. Familycharacteristics have implication on emergence of new business,recognition of opportunity, start up decisions and resourcemobilizations (Aldrich & Cliff, 2003). Financial resources inthe family have direct bearing on entrepreneurial intentions(Raijman, 2001). A series of studies (Evans & Jovanovic,1989) has identified that a lack of financial resources
constrains new and small firms. The theory of liquidityconstraints assumes that a major concern of emergingentrepreneurs is obtaining finance, which would imply thatthe receipt of capital increases an individual’s likelihood ofbecoming self-employed, both through the direct supply ofcapital and through the increased likelihood of bankersproviding capital . However, research on nascententrepreneurship has shown mixed evidence and has generallyfound no effects of household wealth and income (Kim et al.,2003) but a positive effect of individual income (Van Gelderen,1999). The family support model used to explain the financialor social support of their families (Timmons, 1994). Wang &Wong (2004) found that the parents’ financial and social statuswere not significant influence on the self employment.
Review of Literature
The entrepreneurial attitudes of business students have beenthe focus of several recent multi country studies. Akhtar et al(2011) found a significant impact of parents’ income onentrepreneurial acceptability of the university students atUniversity of Karachi, University of Balochistan Quetta andGomal University D I Khan in Pakisthan. Jorunn et al (2011)studied the relationship between resources, entrepreneurialorientation and performance in farm-based ventures and foundthat financial capacity, unique competence and entrepreneurialefforts influence performance in the investigated firms. Sujani(2011) found that there was no significant relationshipbetween family income and overall entrepreneurial intentionamong the students in Sri Lanka. Hence, the family incomefactor has not affected on the entrepreneurial intention ofacademics. Further, this study reveals that field of study,education level, gender and family business experiencesignificantly affected the intention in starting one’s ownbusiness while the financial ability of the undergraduates’family is not related to their business interest.
Linda and Helena (2010) explicated the roles that bothobjective environmental conditions and entrepreneurialperceptions of opportunity and resource availability play inthe process of firm creation. Utilizing longitudinal data onnascent entrepreneurs, it was found that the entrepreneurs’opportunity perceptions mediate between object ivecharacteristics of the environment and the entrepreneurs’efforts to start a new venture. Contrary to the pre-researchexpectations, a similar mediating effect for perceived resourceavailability was not found. The findings of Erkko and Zoltan(2010) suggested a posit ive relat ionship between anindividual’s household income and growth aspirations. Cindy
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et al (2010) found that demographic factors such as gender,household incomes and student status were positively relatedto their entrepreneurship intentions of students studying atthree universities in China.
A recent study (Frazier & Linda, 2008) of family and consumerscience students determined that self-efficacy beliefs relatedto self-employment were positively influenced by exposureto entrepreneurship through family, work, and educationalexperiences. Erkko and Zoltan (2007) found that householdincome was shown to be a particularly strong predictoremphasizing the importance of financial assets and socialcapital for entrepreneurial growth expectat ions. Thesignificant influence of household income on growthaspirations may be due to several reasons. It may indicatethat entrepreneurial growth opportunities may be, to someextent, socially stratified. Household income is an importantdeterminant of one’s social class. High-income householdsmay have better social connections, and they therefore mayget to see better growth opportunities. Another possiblemechanism may concern resource acquisition. It may be thathigh-income households are simply better able to act on theopportunities that they see by mobilizing their householdwealth for the pursuit of entrepreneurial growth. A highhousehold income may also create an expectation for a certainlifestyle, the pursuit of which could then be reflected onentrepreneurial growth aspirations. Kim et al (2006) foundno significant effects of household income and wealth onentrepreneurial entry. Both studies attributed the findings tothe limited resources required for start-ups which are oftensmall in size. Mueller (2006) also found no significant effectsof household income on an individual being a nascententrepreneur. However, Henley’s (2005) findings establishedsignificant positive effects of housing equity on self-employment. These were supported by Hundley (2006) whofound that family income is significantly associated with theprobability of self-employment. Examining the importanceof family financial capital on the transition into self-employment of youths, Dunn and Holtz-Eakin (2000) foundpositive and significant effects at both the individual andfamily level.
Chan (1996) attempted to investigate the correlates ofentrepreneurial orientation of vocational and technical studentsalong five categories, namely: (1) students’ personalcharacteristics (2) family-related matters (3) school-relatedmatters (4) working experience and (5) environmental factors.The findings of this study showed that entrepreneurialorientation was affected by each of the variables under the
following three categories: school-related matters, workingexperience, and environmental factors. However, it was foundthat not all the variables under the categories of students’personal characteristics and family-related matters weresignificantly affecting entrepreneurial orientation. Under thecategory of students’ personal characteristics, statisticalresults indicated that gender has significant effect on theentrepreneurial orientation of students. On the contrary,ethnicity showed no significant difference in entrepreneurialorientation, with all the ethnic groups showing similar levelof entrepreneurial orientation. Other than that, findings onfamily-related matters revealed that there were no significantdifferences in entrepreneurial orientation along family income,parents’ education, and parents’ occupation respectively.Some studies also argued that individuals with little capitalalso pursue an entrepreneurial career out of necessity (Mueller,2006).
In view of the contradictory empirical evidences, the presentstudy aims to contribute to the existing literature on theassociation between the household income and entrepreneurialorientation of potential entrepreneurs.
Objective
The principal aim of this research is to identify the associationbetween household income and entrepreneurialresourcefulness.
Hypothesis
The family income exerts is a s trong influence onentrepreneurial resourcefulness of management graduates.
Methodology
The most probable source of future entrepreneurs is the youthof a country. They are the product of the society and theyreflect the prevalent attitudes (Veciana, Aponte, & Urbano,2005). Therefore it was decided to study the youth studyingin colleges. A sample of 200 final year postgraduatemanagement students were selected randomly from leadingmanagement institutes in Warangal region of the state ofAndhra Pradesh. The respondents were served with aquestionnaire schedule containing 6 statements (Table 1)adopted from the EAO scale of Robinson et al (1991) (to bemarked on a five-point scale, denoting 5 = strongly agree; 4 =agree; 3 = unable to answer; 2 = disagree; and 1 = not at all).The responses are tested with ANOVA and mult iplecomparisons were made through post-hoc test (Tucky HSD)for observing variations with the help of SPSS-19.
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Table-1: Entrepreneurial resourcefulness with components
S.1. I have specific goals in my life Goal orientation
S.2. I always try to be innovative and creative Innovativeness
S.3. I spend some time every day on new ideas New ideas
S.4. I try to invent new product/service or improve existing one Invention skill
S.5. I try to take-up problems that nobody has looked at yet Problem solving
S.6. I can take control in unstructured situations Controlling
Inference
Results and Analysis
The monthly household income has been categorized into threeranges for the purpose of the present study as follows:
i. More than `50000 per month - High income range
ii. Between `20000 - `50000per month - Middle income range, and
iii.Less than `20000 per month - Low income range
Each component of resourcefulness is tested for variancebetween the three income groups and the corresponding meansare compared for an in-depth understanding (Table-2). Aftermultiple comparisons of the mean values of the three groupsthrough Tukey’s technique, corresponding ‘box plots’ also
have been generated to make the analysis morecomprehensive. It is a common observation that a dataexploration should always begin by looking at a graphicaldisplay of the data. Box plots can be used to summarizecomplex results from multivariate analyses. The Box plot isused to visually identify patterns that may otherwise behidden in a data set. The box plot gives graphical informationof the location, dispersion and the skewness of a data set.Further it draws attention to certain potential outliers andallows a visual appreciation of lack of symmetry. Thuscomparative box plots pertaining to the competency ofentrepreneurial resourcefulness are used to compare thedefined three ranges of monthly household income of therespondents.
Table-2: Resourcefulness Household income
S1 - I have specific goals in my life 47.436 .000 High Middle 1.94608*Low 1.59848*
S2- I always try to be innovative and creative 47.983 .000 High Middle 1.94608*Low 0.87121*
Low Middle 1.07487*S3- I spend some time every day on new ideas 218.359 .000 High Middle 2.44118*
Low Middle 2.21390*S4- I try to invent new product/service or 52.735 .000 High Middle 1.94608*improve existing one Low 0.78030*
Low Middle 1.16578*S5- I try to take-up problems 34.671 .000 High Middle 1.50980*that nobody has Low 0.60606*looked at yet Low Middle 0.90374*
S6- I can take control in unstructured situations 39.556 .000 High Middle 1.48529*
Low 1.14439*
* The mean difference is significant at the 0.05 level.
ANOVA Multiple Comparisons : Post Hoc (Tukey HSD)
F Sig.(1) Monthlyhousehold
income range
(J) Monthlyhousehold
income
MeanDifference
(I-J)
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Discussion:
A) Variance: The statistically significant F values (Table-2) obtained through ANOVA for goal orientation 47.436;innovativeness - 47.983; new ideas-218.359; invention skill -52.735; problem solving - 34.671 and controlling skill -39.556,imply the existence of differences of perception among therespondents from three different household income rangesregarding resourcefulness as an essential competency.
B) Multiple Comparisons: Further, the mult iplecomparison of the means of the three groups through Tukeytechnique establish that the respondents with a higherhousehold income (>`50000) yield relatively high meanvalues on all the components of resourcefulness differingsignificantly at 0.01 level with the other two groups belongingto middle (between ` 50000 - ` 20000) and lesser (<` 20000)monthly household income ranges respectively (Table-2).
Regarding the component of goal orientation, the respondentsfrom higher monthly household income differ with those ofmiddle range household income by a mean difference of1.94608 and from those hailing from low family income rangewith a mean difference of 1.59848. Thus, the respondentshailing from high-income families stand ahead of the othertwo groups on their preference for goal orientation. Similarly,the same group stays ahead of those from middle range familyincome on the component of innovativeness with a meandifference of 1.94608; 2.44118 for new ideas; 1.94608 forinvention skill; and 1.50980 for problem solving. The
respondents hailing from low household income range stand
in between the groups with high and middle household incomes
on all these components. Regarding controlling skill, both the
high (> `50000) and low (<`20000) household income groups
differ with the middle range income group (`20000 - `50000)
with the significant mean differences of 1.48529 and 1.14439
respectively.
C) Box Plots: The observations from the corresponding box
plots are explained in terms of location, dispersion and
skewness of the responses of the three groups.
Comparison of Location: The median of higher family income
(> `50000) group (4.5000) is greater than those of low
(<`20000) household income (3.0000) and middle range
(`20000-`50000) income group (2.0000) for goal orientation
(Figure-1). On the components of innovativeness and
invention skills, the high and the low monthly household
income groups oscillate (Figure-2 & 4) between the median
values of 4.5000 to 4.0000. It is interesting to note that in the
case of preference for new ideas (Figure-3), the respondents
with low family income yield absolutely higher median value
(5.0000) than high income group (4.5000). However, both
the high and low family income groups exhibit similar median
(4.0000) for problems (Figure-5). For the component of
controlling skills also, the higher and lower family income
groups move together with a similar median of 4.0000 keeping
themselves much ahead from the middle household income
backgrounds with a median of 3.0000 (Figure-6).
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Comparison of Dispersion: The inter-quartile range (1.00) ofthe respondents with high family income (> ‘50000) is shorterthan that of middle income (‘20000 - ‘50000) background(2.00) which in turn is shorter than the range (3.00) for lowhousehold income (<‘20000) group implying that the samplevariability of respondents with less household income is highin comparison with the other two groups and the variabilityof the middle income group is higher than high monthly incomegroup regarding goal orientation (Figure-1). Thus there is aninverse association of sample variability on goal orientationwith household income since the variability decreases as thehousehold income increases. Regarding the component ofinnovativeness (Figure-2), the sample variability of the lowas well as the middle range income groups is similar with aninter quartile range of 2.00 and higher than that of high incomegroup (1.00), invention skill (Figure-4), and problem solving(Figure-5). The sample variability of low and high incomegroups is similar (1.00) and lesser than the same value (2.00)of middle household income group for new ideas (Figure-3).Regarding the component of controlling skill (Figure-6), theresponses of low and middle household income groups showsimilar variance with an inter-quartile range of 2.00 while thehigh monthly income group exhibits lesser variance (1.00).
Comparison of Skewness: The measure of skewness explainsthe degree and direction of asymmetry. The distribution ofthe high income group is skewed to the left (-0.656) for goalorientation and the lower tail of the respective box plot islonger than the upper tail indicating that the data sampled areconcentrated on the high end of the scale while the distributionsof the respondents from middle and lower income householdsare skewed to the r ight with lengthy upper tai ls byconcentrating on the lower values of the scale. The high andlow household income groups show more or less similarskewness to the left on the aspects of innovativeness (-0.656& -0.857) and invention skill (-0.656 & - 0.781) while theresponses of middle income group were skewed to the righton both these aspects (0.594 & 0.594 ) with long tails.Regarding the issue of new ideas, the distribution of the lowincome group is highly left-skewed with a Pearson’sCoefficient of -1.213. The distributions of the low and highHousehold income groups was moderately left-skewed (-0.380&-0.426 respectively) on the component of controlling skillwhere as that of middle income range is approximatelysymmetric (-0.080).
Outliers: Outliers are the extreme values that deviatesignificantly from the rest of the sample and they can exist
above or below the whiskers of the box plot. It is statisticallyproved that regardless of size, at least 30% of samples drawnfrom a normally-distributed population will have one or moredata flagged as outliers. Data outside the outer fences areconsidered to be extreme outliers. In the present data set, thepresence of the extreme outliers in the distribution of lowhousehold income group for the issue of new ideas under thecomponent of innovation (Figure-3) may be evidence that apopulation has a non-normal distribution.
General observations: The respondents from higher householdincome show a consistently strong belief on goal orientationas the median value concerned (4.5000) is higher than theupper quartile values for the other two groups with lesserfamily income. Thus it can safely be said that goal orientationis strongly associated with household income of therespondents.
The competencies of innovativeness, new ideas, inventionskill and problem solving attract a consistently strongpreference from both high and low family income groups asthe median values of both the groups on the four issues reclinebetween 4.0000 and 5.0000 whereas the same values for middleincome group hover around 2.0000. Consequently, it can beinterpreted that these traits are significantly influenced bythe family income level of the respondents. Similar dispersionis observed for the component of controlling skill as the medianvalues of high and low household income (4.0000) groups issame and higher than that of middle income group (3.0000)which meant that controlling skill proved to have a strongassociation with household income of the sample group.
Conclusion
From the analysis of the data, it can be concluded that theentrepreneurial resourcefulness is strongly associated withthe household income of the respondents. The group withhigher household income leads on all the competencies tested– goal orientation, innovativeness, new ideas, invention skill,problem solving and controlling skill, followed by those fromlower income families on more or less all the components.However, the issue of generating new ideas attracted arelatively stronger preference from low income group. Therespondents hailing from families with middle householdincome comparatively trail behind the high and low householdincome groups on all the components of entrepreneurialresourcefulness. Thus the household income of the potentialentrepreneurs emerges to be a critical determinant ofentrepreneurial orientation.
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The research provides some vital insights to the field ofentrepreneurship. It is recommended that the controllingbodies of management education should aim at reforming theentrepreneurship training curriculum to motivate themanagement graduates hailing from middle and low familyincome levels towards entrepreneurship through more andmore exposure to industrial and business activities to ensurea bright future for the nation.
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Enhancing Organizational Performance:Indian IT Sector
Iliyas Mohammed
The purpose of this study is to examine the relationship among Human Resource Management, Knowledge
Management Capability and Organizational Performance. A questionnaire based survey was used to collect primary
data. Responses were received from 246 employees working in Indian Information Technology sector. Partial least
square path modeling was used for data analysis. The results show that Human Resource Management Strategies
influence Knowledge Management Capability which in turn enhances Organizational Performance. This paper is
limited to Indian Information Technology employees. Therefore the influence of culture should be considered in
further studies. Upcoming research can be intended for different countries in order to carry out a comparative study.
Abstract
Dr. S. Iliyas Mohamed, Assistant Professor,Dept. of Computer Science , Jamal Mohamed College,Thiruchirapally - 620020
Key words: Human Resource Management, Knowledge Management Capability and Organizational Performance
he growing attention around human resource
management (HRM) has caused a considerable body of
empirical research to come into sight, investigating the
influence of HRM practices on organizational performance.
Human resource management practices have the potential to
enhance organizational performance (Marchinton and Wilkinson,
2003). Researchers have identified the best human resource
management practices which can be associated to organizational
performance. They are high levels of teamwork, performance-
related pay, decentralised decision making, comprehensive
employee recruitment and selection procedures, limited status
differences, extensive training, employee involvement and internal
communication arrangements, internal career opportunities and
broadly defined job descriptions (Jones and Wright, 1992; Pfeffer,
1994; Jackson and Schuler, 1995; MacDuffie, 1995; Marchinton,
1995; Milgrom and Roberts, 1995; Delery and Doty, 1996; Becker
and Huselid, 1998; Pfeffer, 1998; Wiesner and McDonald, 2001;
Bowen et al 2002; Guest et al 2003; Michie and Sheehan, 2005; de
T
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Kok et al 2006). There are mechanisms which play a very
important role in strengthening the relationship between human
resource management and organizational performance. Human
resource management plays a vital role in companies which are
directed towards knowledge management (Cabrales et al, 2010).
This study focuses on whether knowledge management capability
acts as a mediator in the relationship between human resource
management practices and organizational performance. The direct
relationship between human resource management and organiza-
tional performance and human resource management and knowledge
management capability, are also tested. The study aims to propose
a model to explore the relationship between human resource
management, knowledge management capability and organizational
performance.
Research Objectives
The cardinal objective of the study is to seek empirical
relationships among human resource management, knowledge
management capability and organizational performance. However,
to achieve this overall objective, following sub-objectives have
been formulated:
1. Perform meta-analysis of the contemporary research and
identify the variables of human resource management,
knowledge management capability and organizational
performance.
2. Develop and validate a metric to measure the above variables
of study.
3. Undertake an empirical research to seek relationship between
the above variables.
4. Develop an empirically validated model to fill the research
gap in explaining the relationships between the above study
variables.
Literature Review
Human resource management and knowledge managementcapability
Narasimha (2000) suggests that effectively HRM is the key to
amplifying the effect of knowledge management. In fact, HRM
strategies can influence employees’ beliefs and values, which
consequently affect organizational culture (Marshall et al 1996).
It is concluded that HRM has significant influence on organizational
knowledge repository and management. Thus, HRM policies in
selection, training, performance appraisal, etc, must be aligned
with knowledge management strategies to enhance
organizational functioning (Svetlik and Stavrou-Costea, 2007).
The work done by Ikeno et al (2007) leads to the conclusion
that appropriate human resource management is one of the
critical factors for effective knowledge management. Thus, :
the hypothesis evolved is ;
H1 . Human resource management affects knowledge
management capability.
Human resource management and organizationalperformance
Research has established positive relationship between human
resource management and organizational performance. Osman
et al (2011) indicated that three main human resource
management practices namely employee relations and
communication, career planning, and job/work design have
the highest influence on organizational performance.
Moideenkutty et al, (2010) examined the relationship between
Human Resource Management (HRM) practices and
organizational performance and indicated that organizations
that implemented highly selective staffing, extensive training,
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Research Methodology
This basically is an empirical study and as the name suggestsit relies on experience or observation alone, and it can even bewithout due regard for system and theory. This is basically adata-based research, coming up with conclusions which arecapable of being verified by observation. The starting pointof this research has been a working hypothesis on theinterrelationship between human resource management andknowledge management potential , human resourcemanagement and organizational performance, knowledgemanagement capability and organizational performance.Empirical research is most appropriate when proof is soughtthat certain variables affect other variables in some way andhence this approach has been adopted in this research.
As far as the approach is concerned, it is both qualitative aswell as quantitative in nature. It is qualitative because thevery formulation of hypothesis is qualitative in nature as itinvolves the study of the theoretical models which exist anda thorough understanding and reasoning if there could be anassociation between the variables of study. Literaturepertaining to human resource management, knowledgemanagement potential and organization performance have beenstudied to understand the bearing of each one of them, andused in the formulation of the working hypothesis.
Respondents
The respondents were employees working in Indian ITindustry. The sample size of the study is 246 employees,disproportionate simple random sampling was used asstratification wise response was not important for the specific
purpose of this research, pilot study was undertaken with a
sample of 45 random employees so that modifications and
simplifications of the jargons used were incorporated. Theinstrument had been validated for content, construct andcriterion validity. Finally, the metric in the form of a self-administered questionnaire (Appendix I) with 5-point Likertscale was served to 300 employees (response rate 82%), tocollect the data.
Procedure
The respondents were contacted through online survey. Theanonymity of respondents was guaranteed to ensure that therewould be no bias in their response.
Questionnaire and measures
This study employed a self-administered and structuredquestionnaire, with most of the questions developed throughmeta-analysis of the literature. Meta-analysis is basically aresearch procedure where all the literature relevant to thestudy is scanned and the most of the variables of interest areseparated and scanned for the association with other variablesso that a relation can be established between these variablesof study. This would be of particular use while developing ametric for measurement. Even though standard metrics wereavailable for some of the dimensions of study as this study isspecially oriented towards the three variables of interest, thequestions needed rephrasing to suit the purpose and hencevalidation was to be carried out. One expert evaluated thequest ionnaire, which then was pre-tested with f iverespondents. The five respondents were chosen because oftheir expertise and knowledge. On the basis of the commentsand evaluations from both the expert and the five respondents,some questions have been re-worked on for the sake of
Figure 1. Hypothetical Research Model
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improving the clarity, readability and understandability ofquestionnaire.
The questionnaire thus developed had separate sections for humanresource management(5), knowledge management capability (3),organizational performance (6). In addition to these sections therewas a separate section on socio-demographic characteristics,including age, gender, designation, level of education, and income.
Sample Characteristics
Out of the 246 respondents 81% were male and 19% were femaleemployees of IT. Experience wise 53% of the respondents had 2-5 years of experience, 22% of the respondents had less than twoyears of experience, 16% of the respondents had 6-10 years ofexperience and 9 % of the respondents had more than ten years ofexperience. About 43% of the respondents were drawing a salaryof more than ̀ 50,000 per month, 36% were in the range of ̀ 30,000to `50,000,16% of the respondents were drawing a salary of`20,000-30,000, and only 5% were drawing a salary in the rangeof less than ` 20,000. Majority of them were in the age group of25 to 30 years (63%), quite a sizable number were less than 25years (19%), a small number were in 35-45 years of age (13%) andin the category of above 45-55 years only 5% of the respondentswere present. Qualification wise, 38% of the respondents werePost graduates, and 30% of the respondents were Under Graduatesand other respondents were professional/PhD holders.
Data Analysis and Results
Method
The analysis of data employed partial least square (PLS) approachto structural equation modelling (SEM). The reason for this choiceis the simple fact that partial least square path modelling (PLSPM)is an analytic technique that runs principal component analysis(PCA) and regression analysis simultaneously. Thus, PLSPM isconsidered to be a more efficient analytic technique than theconventional method, in which, PCA and regression analysis areperformed separately. Further PLSPM successfully avoids multi-collinearity and measurement errors, while addressing the cause-effect relationships among the research constructs. There are twoapproaches, namely, covariance and PLS based approach. Thecovariance – based approach for SEM needs a larger sample (thedefinition of large size varies from one author to another viz. somedefine it as sample having more than 100 subjects and some othersdefine it as a sample having more than 200 subjects, at least threeindicators and typically requires reflective mode). PLS pathmodelling (PLS-PM) is generally meant as a component basedapproach to SEM that privileges a prediction oriented discoveryprocess to the statistical testing of causal hypotheses. Further,
PLS does not make assumptions about the population or scale of
measurement and there are no distributional requirements (Fornell
and Bookstein, 1982). Another benefit of PLS over other SEM
techniques such as AMOS, LISREL is that it allows both
formularized and reflective indicators to be used in the model
(Fornell and Bookstein, 1982). Therefore, this study used PLS
technique using SmartPLS® software. The PLS analysis pursued
here is a two-stage approach by first assessing the measurement
model (validity and reliability), and then assessing the structural
model by an estimate of the paths between the latent variables in
the model and its predictive power.
Measurement Model
This study investigated the internal consistency of the metric and
used three validity assessments viz., content validity, convergent
validity, and discriminant validity, and also, the construct reliability
and goodness of fit through R-square. Considering the exploratory
nature of this study, the reliability of the study in terms of internal
consistency is acceptable in terms of Cronbach’s Alpha (0.7 and
were all above the suggested value of 0.7 (Dillon-Goldstein’s rho),
indicating acceptable internal consistency. Content validity is
mainly judgmental based on the meta-analysis of literature and
discussion with the experts. In this research for each construct the
relevant literature has been analyzed for its suitability and during
the pilot run the content has been validated by the experts.
Convergent validity is by calculating the item-to-total correlations;
that is, the correlation of each item to the sum of the remaining
items within a variable. Convergent validity measures the extent
to which the items truly represent the intended latent construct.
Convergent validity is assessed by factor loading and composite
reliability measures (Hair et al, 1998). Only factor loading above
0.6 have been considered in this research (Table - 2), which are
adequately high (suggested cut-off value 0.4). The composite
reliability measures the extent to which items in the construct
measures the latent concept. A commonly acceptable threshold
value for composite reliability is 0.7 or more, although values
slightly below 0.7 have been considered acceptable (Haire et al,
1998). The composite reliability in this research is above 0.7,
which indicates reasonably high construct reliability. The average
variance extracted (AVE) values (Table - 1), in the present research
are all above the suggested values of 0.5 and the metric has relatively
high discriminant validity (Fornell & Larcker, 1981). Another
method used for testing the discriminant validity is, the square
root of the AVE of each construct needs to be much larger, although
there are no guidelines about how much larger, than any correlation
between this construct and any other construct (Gefen & Straub,
SCMS Journal o f Indian Management , July - September, 2013 90
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2005). In this research this holds good for most of the constructs
as the values are adequately large (Table - 3). Further, the highestcorrelation is between knowledge management potential andorganizational performance, which is later proved by thehypothesis testing. Finally, R-square is the measure of goodnessof fit, is basically one minus the square of unexplained variance.
The larger the R-square value the better is the fitness of the
model. In the present research, R-square values for all the
endogenous variables are above 0.6, which indicate that there is
more than 60% of influence of exogenous variables on the
endogenous variables of study.
Table 1: Reliability and internal consistency of the variables
AVE CronbachsAlpha
CompositeReliability
RSquare
CronbachsAlpha
Redundancy
Human resource management 0.8713 0.9713 - 0.963 0.8713 0
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n this modern scenario human beings are living inmidst of various events and they should adapt tothe various environmental factors for the purpose of
life existence. Before several decades, people in the worldwere stress free, because they were not much influenced bythe environmental factors such as technology, politics,economy and other social interactions. But today it is notlike that, every man and woman living in any culture or in anysociety are bounded by the major problem called Stress. Thisstress may be of different types and it is influenced accordingto the nature and position held by a person in the society orin an organization. This should be curtailed when we studythe reason for stress which influences a person in the studentlevel. Several studies have been undertaken to analyze thestress among the college students. Tara Smith and KimberlyRenk (2007) researched on Predictors of Academic-RelatedStress in College Students. Similarly, Bhavin U. Pandya et al
(2007) studied the Impact of Academic Stress on MBA
Abstract
The purpose of this study is to throw light on different types of stress factors, stress symptom and their impactof stress on college students from three different major disciplines namely Arts, Engineering and Management inTiruchirapalli district, Tamil Nadu.Transition of students from school environment to College environment couldcause a psychological, academic and social shock to them, since the educational system has huge differences: thestudent will face new methods of teaching, new academic requirements, new type of relations between studentsand faculties and even new relations among students themselves. Due to these changes, students can potentiallyexperience different types of stress that can affect their mental health, social health and their academic achievements.Stress is one of the main aspects of our modern life, resulted from the rapid changes in human life, so this ageis called the age of stress, students suffer from academic stress resulted from testing, home works and othercollege requirements which may exceed their abilities, sometimes the same person suffers from different types ofstress at a same time.
I
Dr. G.S. David Sam JayakumarAssistant Professor, Jamal Institute of ManagementTiruchirappalli – 620 020South India, India. E-mail:[email protected]
A.Sulthan, Research Scholar ,Jamal Institute of ManagementTiruchirappalli – 620 020, South India, IndiaE-mail:[email protected]
SCMS Journal o f Indian Management , July - September, 2013 96
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Students of Gujarat Technological University. On the other
hand. Laura P. Womble (2009) made a study on Impact of
Stress Factors on College Students Academic Performance.
Maureen Johnson (2009) researched on Community College
Students’ Perception of Stress. Moreover, Joseph E. Agolla
et.al (2009) carried a case study of University of Botswana
which is an assessment of academic stress among
undergraduate students. Reem Rachel Abraham et.al (2009)
submitted a report on Stress among First Year Students in an
Indian Medical School andAlicia A. Larkins (2010) evaluated
the Impact of Stress-related and Culturally-specific Factors
on College Alcohol Consumption.Cheng Kai-Wen (2010) has
investigated the sources of stress among college students in
Taiwan. Similarly, Ahmad M. Thawabieh et al (2012) made an
assessment on Stress among University Students.
2. Theoretical Framework of Stress
What is Stress? - The term “Stress” is borrowed from the
discipline of physics. Stress actually means pressure. This
inner pressure is a psychological and physiological response
to events that upset our personal balance. Stress is simply
defined as the body’s non-specific response to any demand
placed upon it. The responses may be physical like head
ache, emotional like fear or sadness and behavioural increased
anxiety. If a person experiences a continuous state of
depression due to stress over a prolonged period of time and
cannot return to a relaxed state, then the stress becomes
negative and risky. Some destructive strategies to reduce these
stresses include using tobacco, drinking alcohol, taking illegal
drugs and overusing prescribed medications. All of these
strategies can only bring a short term relief but at a high cost
of damage to both body and mind. Are all the stresses negative
or bad? Should everyone strive to stamp stress out of their
life completely? The answer is definitely no! Positive stress
serves some useful purposes in our lives. A positive stress
sometimes drives a person towards his success. For example,
stress is essential for learning because a research study says
that learning takes place only under moderate conditions of
stress levels. So our goal must be to keep our stress at a
moderate level, neither too low or stress free that we may feel
bored nor so high that we are overwhelmed.
Stressors among College Students
Adolescence is a stage of human development that occurs
after childhood, and specifically between the ages of 15 to 25
years and viewed as a stage where young people experiences
a rapid growth both physically and mentally. All the college
students fall in this category of Adolescent stage. At this
stage the students will have fast physical changes and mental
development. However, students sometimes may experience
incompatibility of their mental development with their
physical changes or with the social environment and thus
suffer from problems or stress arising from inadequate
adaptation. These stresses may further cause psychological
troubles and even induce deviant behaviours. Adolescence is
thus a dangerous period of time where young people
experience self-organization and role confusion. For them
stress mainly comes from academic tests, interpersonal
relations, relationship problems, life changes, hormonal
changes, career exploration and high expectations. Such stress
may usually cause physical, psychological and behavioural
problems. College students are at a critical period of life,
where they enter adulthood which decides their future life
and career. They are expected to be the elites in the society.
Thus, they should enhance their stress management abilities
so as to live a healthy life after entering the society. For
college freshmen, they need not only to adapt themselves to
the new life and new environment but also be familiar with
new people, events and things. The life stress on them is
considerable and tolerable. Therefore, understanding the
source of stress among them and how they can cope with the
stress is very important.
Causes for college Students Stress
The potential causes of stress are numerous. It may be linked
to the outside factors such as the state of the world;
environment in which one lives or works, or the family. It
may come from one’s own irresponsible behaviour, negative
attitudes, or feelings or unrealistic expectation. The causes of
stress are highly individual. They depends on the personality
general outlook on life, problem solving abilities, and social
support system. Many different things cause stress-physical
to emotional. Identifying what causes stress is the first step
to deal with stress. For College Students, irrespective of their
disciplines the stress is caused mainly due to two set of factors
namely Academic factors and Non-academic factors.
Academic Factors - Academic pressure is a significant source
of stress for many college students. Identified sources of
academic-related stress have included fear of falling behind
with coursework, finding the motivation to study, time
pressures, financial worries, and concern about academic
ability. Additionally, students report stress over struggling
SCMS Journal o f Indian Management , July - September, 2013 97
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to meet academic standards, time management worries, andconcerns over grades. Additionally, these sources may existeasily throughout the span of college students’ academiccareers and may result in college students’ experiencing a greatdeal of stress during their college career. The following aresome of the common academic stress factors found in thestudents of all the three major disciplines i.e. Arts, Engineeringand Management students and hence the same are used in thequest ionnaire. They are Improper teaching, Lack ofinformation to be learnt, Competition for scoring marks,frequent examinations, Long hours of academic work, Barriersin communication, Heavy work load, Inadequate resources,Irregular attendance, Dilemma in choosing the Discipline andInsufficient library facilities.
Non-academic Factors - Apart from academic pressure thereare many other reasons which aggravate stress among students.They may be due to their personal inferior complex feelingsdue to lack of confidence, misguidance, undesirable habitsdue to wrong friendship, immaturity, sedentary lifestyle,misunderstanding with their parents, friends and relatives,financial problems, inconvenient environment in the societyand fear about their future. The following are some of thecommon non-academic stress factors found in the students ofall the three major disciplines i.e. Arts, Engineering andManagement students and hence the same are used in thequestionnaire. They are Inconvenient accommodation,Difficulty ofbeing social with same age group, Insufficienttime for recreation, Lack of health, Poor infrastructure, homesick, Financial problems, Uncertainty of job after graduationand High expectations from parents.
Stress Symptoms- Symptoms are some of the reactions andchanges due to stress. Every one reacts to stress differently.But there are common symptoms of stress. People may shakeuncontrollably, breathe faster, deeper than normal or evenvomit. Stress can trigger an asthma attack. Symptoms of stressin students may appear in many forms. Some symptoms willonly have impact on the individual who is direct lyexperiencing the stress, while the other symptoms of stressmay have an impact over their relationship with others.Perhaps some experiences both when their stress levelsare elevated.The three main stress symptoms of collegestudents are Physical symptoms- Headaches, Digestiveproblem, Sleep disturbance, Fatigue, High Blood pressure,Weightgain or loss and Asthma or shortness of breath.Emotional symptoms-Hypersensi t ive, Rest lessness,Depression, Anger, Irritation, Lack of confidence, Apathy
and Urge to laugh or cry at inappropriate times. Behavioralsymptoms-Eating more or less, Sleeplessness, Isolation,Neglecting responsibilities, Increased alcohol and drug use,Nervous habits, Teeth grinding or Jaw clenching, Overdoingactivities such as exercising or shopping, Losing temper andOverreacting to unexpected problem.
3.Methodology and Instrumentation
Sampling framework
The research is a sample survey to elevate the impacts ofacademic and non-academic factors of college students on thestress symptoms. For this the researcher adapted a Purposivesampling method.Moreover under the three disciplines namelyArts, Engineering and Management, the researcher has selectedthree Engineering Colleges namely PABCET, Saranathan andJJ Engineering College respectively for the purpose ofevaluating the College students stress symptoms in engineeringdiscipline. Similarly, for the purpose of analyzing the Collegestudents stress symptoms in arts discipline we selected IndiraGandhi College for women, Bishop Heber College and St.Joseph College respectively. In the same manner, in order tostudy the stress symptoms of the Management students theresearcher selected three famous colleges in Tiruchirapallidistrict they are Bishop Heber College, St. Joseph Collegeand JJ College respectively.
Determination of Sample Size
In order to determine the sample size for this research studythe following formula is used:
where, n is the sample size, z is the standard normal variatevalue (1.645) at 95% confidence level, e is the allowablesampling error at 5% and s is the standard deviation of theraw stress symptom score.
Based on the Pilot study, the standard deviation of the rawstress symptoms score of the college students based on thedisciplines namely Arts (0.04394), Engineering (0.265) andManagement (0.3274) are calculated. Now by substitutingthe above said values in the formula, we get the requiredsample size of the college students and each discipline isderived and it is the lower limit of the sample size used toanalyze the stress symptoms of the college students inTiruchirapalli District and it is given as follows Arts (209),Engineering (76), and Management (116).
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Data Collection and Instrumentation
A well-structured Questionnaire prepared by the researcher
after the completion of pilot study, is with rectifying the
short comings faced in the pilot study. The finalized
questionnaire is divided into three parts, in which Part 1
includes the questions regarding personal demographic profile
of the college students; Part 2 elucidates the conceptual
questions under two dimensions namely academic factors (11)
and non-academic factors (9). Similarly Part 3 exhibits the
questions regarding the stress symptoms of the students
which compressed (7) items. All these items were anchored
at five point likert scale (from 1 to 5). Finally secondary
information regarding the profile of the college students and
related reviews are also collected by the researcher through
the internet source. The researcher also visited all the
aforementioned colleges in Tiruchirapalli District for thepurpose of conducting some formal discussion with thefaculties and the students.
4. Data analysis and results
The data was analyzed with the help of standard statisticalpackage namely SYSTAT 13, IBM SPSS 20 and IBM SPSSAMOS 20. At first the collected data were organized andlogically tabulated. Cross tabulations were prepared accordingto the subject discipline of the students; with this one wayanova is also used to find the mean equivalence of theperception regarding the items under academic and non-academic factors according to the discipline. Secondly,Structural Equation Modelling is applied to propose a multi-dimensional model of evaluating stress symptoms of collegestudents in Tiruchirapalli District.
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Table no.1 visualizes the result of the Shapiro-Wilk test for
checking the univariate normality of the items under three
different dimensions such as Academic factors (11), non-
academic factors (9) and stress symptoms of students (7)
respectively. From the table, Shapiro-Wilk Test confirmed
that the items under dimensions based on different discipline
are purely departed from univariate normality at 1%
significance level. This shows the perception score of the
students about their stress symptoms are not normally
distributed and it followed an abnormal distribution. Hence
the researcher assumed all the items followed the univariate
normal distribution. Table no.2 exhibits the result of
multivariate test of normality such as Mardia’s multivariate
Skewness, Mardia’s multivariate kurtosis and Henze-Zirkler
test respectively. These tests are valid under the assumption
all the items are inter correlated. The result of the test
confirmed that the items are deviated from normality and it
followed a multivariate non normal distribution. Hence, the
researcher assumed all the items followed a multivariate
normal distribution and this assumption was carried out to
do further analysis about the stress of the students. Table
no.3 visualizes the personal and Demographic Factors of
students based on Discipline. As far as Arts students are
concerned a majority of the respondents are female. About
61.24% of students are of the age group of above 21, and
68.42% of students having below 5 members in their family.
The majority of 64.59% of respondents are UG students. In
this case a majority of Arts students are affected by headaches,
which is fol lowed by muscular tension and fat igue
respectively. As for engineering students 56.5% of students
are male respondents and 43.5% of students are female
respondents. Majority of the students are of the age group of
above 21 and 55% of students have family member s below 5.
The majority of 61.81% of respondents are UG students. As
far as problem concern engineering students are highly affected
by headaches which are followed by muscular tension and
fatigue. As far as management students concern 59.4% of
students are male and 40.6% of students are female. Most of
the students are at the age group of above 21 and 61.2% of
students have family members below 5.The majority of the
respondents of management students are UG students. In
case of problems concern, majority of the students are affected
by headaches which is followed by fatigue (24.13%) and
muscular tension(22.4%).The pooled results show, the
majority of respondents are female(57.6%)and 42.4% of male.
Most of the respondents are at the age group of above 21.The
majority of the students have family member below 5 and
36.16% of students have more than 5 members in their family.The majority of the respondents are UG students. In case ofproblems concern, headache is the major problem among thestudents (52.12%) which is followed by muscular tension(23.44%) and fatigue (18.95%). Table no.4 describes themultidimensional influence of Academic and Non Academicfactors for Arts students. The result of the confirmatory factoranalysis and measurement model of analysing the studentsstress symptoms reveals that the academic factors influencedthe physical stress of Arts students with the un-standardizedcoefficient of 0.883 followed by the non-academic factorswith the positive co-efficient of 0.096 and 0.11 which alsopositively increase the emotional stress and behavioural stressof the students. Moreover, if the physical stress increasesthe Arts students suffer from breathing problem followed bythe emotional stress which leads and disturbs the students’concentration. Similarly, the above said factors and theirinfluence are also statistically significant at 1% level basedon the critical ratio test. As far as model fitness is concerned,the Root Mean residual (RMR) (0.213), Goodness of fitIndex (GFI) is more than fifty percent, Root Mean squareerror of approximation (RMSEA) is also close to 0 andProbability (p-close) of the estimated RMSEA is alsosignificant at 1% level which are the additional evidence whichleads the researcher to finalize the proposed multidimensionaland structural model of students stress symptoms as a validmodel for evaluating and measuring the students, stress forArts students in Tiruchirapalli. Similarly,Table no.5 describesthe multidimensional influence of Academic and Non Academicfactors for engineering students. The result of the confirmatoryfactor analysis and measurement model of analysing thestudents’ stress symptoms reveals that the academic factorsinfluenced the physical stress of engineering students withthe un-standardized coefficient of 0.308 increasing thebehavioural stress of the students. Similarly the above saidfactors and its influence are also statistically significant at1% level based on the critical ratio test. As far as model fitnessis concerned, the RMR (0.190), GFI is more than fifty percent,RMSEA is also close to 0 and p-close of the estimated RMSEAis also significant at 1% level which are the additional evidencewhich leads the researcher to f inal ize the proposedmultidimensional and structural model of students stresssymptoms as a valid model for evaluating and measuring thestudents’ stress for engineering students in Tiruchirapalli. Asfar as Table no.6 is concerned its describes the multidimensionalinfluence of Academic and Non Academic factors forManagement students. The result of the confirmatory factoranalysis and measurement model of analysis the students
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stress symptoms reveals that the Non Academic factorsinfluenced the physical stress of management students withthe un-standardized coefficient of 1.313 followed by whichincreasing the emotional stress of the academic factor withthe positive co efficient 0.913.Moreover the emotional stressincreases for management students and are suffered by lackof concentration. Similarly the above said factors and itsinfluence are also statistically significant at 5% level basedon the critical ratio level. As far as model fitness is concerned,the RMR (0.208), GFI is more than fifty percent, RMSEA isalso close to 0 and p-close of the estimated RMSEA is alsosignificant at 1% level which are the additional evidence whichleads the researcher to finalize the proposed multidimensionaland structural model of students’ stress symptoms as a validmodel for evaluating and measuring the students’ stress formanagement students in Tiruchirapalli.In Table no.7 thepooled analysis of multidimensional influence of Academicand Non Academic factors for students are shown. The resultof the confirmatory factors analysis and measurement modelof analysing the students stress symptoms reveals that theacademic factors influenced the physical stress of pooledstudents with the un-standardized co-efficient of 0.924 andemotional stress is 0.435 co-efficient of the students.Moreover, if the emotional stress is more than the physicalstress of the pooled students, the students are led to sufferand disturbed from concentration and continuous thinkingfollowed by the Behavioural stress due to which they takecounter medication to relax. Similarly, the above said factorsand the influence are also statistically significant at 1% levelbased on the critical ratio test. As far as model fitness isconcerned, the RMR (0.174), GFI is more than fifty percent,RMSEA is also close to 0 and p-close of the estimated RMSEAis also significant at 1% level which are the additional evidencewhich leads the researcher to f inal ize the proposedmultidimensional and structural model of students’ stresssymptoms is a valid model for evaluating and measuring thestudents stress, for students in Tiruchirapalli.
5. Conclusion
This study is an evidence that irrespective of their disciplineseither arts or engineering or management, all the collegestudents are experiencing stress but their levels may differ.To get rid of this stress, not only the students but also theparents, faculties and the College Management do have their
part to play. Parents must be aware of their child’s problemsand should not force their high hopes on the students. TheFaculties may pay attention to students’ problems withlearning and apply appropriate strategies to enhance theirlearning effectiveness to relieve from their academic stresses.In addition, Management of the College Institutions/Universities shall also provide courses on life stress copingon a regular basis to consolidate students’ psychology andteach them how to relax themselves along with stressmanagement skills to deprive then from their non-academicstresses. The main strength of this comparative study is thepoint-of-view of the researcher. We feel glad that if this studycontributes to students’ academic performance and their lifeafter graduation to an appreciable extent.
References
Ahmad. et.al (2012) “Assessing Stress among UniversityStudents.” American International Journal of
Contemporary Research, Vol. 2 No. 2, 110-116.
Alicia A. Larkins (2010), Impact of Stress-related andCulturally-specific Factors on College AlcoholConsumption
Bhavin U.Pandya (2007), Impact of Academic Stress on MBAStudents of Gujarat Technological University.
Cheng Kai-Wen (2010), “The sources of stress among collegestudents in Taiwan.
Joseph E. Agolla et.al : The case of University of Botswana,Educational Research and Review, Vol. 4 (2), 063-070,
Laura P. Womble (2009), Impact of Stress Factors on CollegeStudents Academic Performance.
Maureen Johnson (2009), Community College Students’Perception of Stress.
Reem Rachel Abraham, et.al (2009) “ A report on stress amongfirst year students in an Indian medical school” South
East Asian Journal of Medical Education, Vol. 3 no. 2,78-81.
Tara Smith et.al (2007) “Predictors of Academic-Related Stressin College Students: An Examination of Coping, SocialSupport, Parenting, and Anxiety” NASPA Journal, Vol.44, no. 3, 405-431.
SCMS Journal o f Indian Management , July - September, 2013 110
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Reviewed by Devi Pisharady
Asst. Professor, SSTM
Prathap Nagar, Muttom, Aluva-683106
Ernakulam, Kerala,
Skimming
Scanning
S A
DN
Book Title : Management of Technology –The Key toCompetitiveness and Wealth Creation
Authors : Tarek Khalil and Ravi Shankar
Edition : Second
ISBN 13 : 978-1-25-900181-9
ISBN 10 : 1-25-900181-4
Publisher : Tata Mc Graw Hill Education Pvt. Ltd., New Delhi
echnology is inevitable in the progress of
human life all through these ages and today,
technology is seen as a crucial element of the global
strategy for economic growth. It plays a major role in bringing
in operational excellence to businesses as well as providing a
competitive edge over its competitors. For any technology to
be viable and sustainable it should be
commercialized. Thus it is imperative
to manage this technology effectively
to utilize its full potential in a fruitful
way.
Professor Khalil. T.M, University of
Miami and Professor Shankar R. IIT
Delhi have endeavoured to make
engineering students as well as
management professionals recognize
the importance of managing technology
and i ts role in competi t iveness.
Management of Technology in its
second edition is comprehensive and
it has a business enterprise perspective
focusing Technology as the driver for
wealth creation.
The introductory chapter depicts the interdisciplinaryrelationship of technology in an easily digestible format tothe readers. It also gives an insight into the explosion ofknowledge as a result of the revolution in IT towards the endof the 20th century. Managing technology optimally andappropriately can bring in wealth creation. Author also
suggestes that the know-how oftechnology alone cannot bring inwealth but the success lies in theability to manage the technologyappropriately. Excerpt from the bio-sketch of technology guru Steve Jobsis also an inspiration for the reader.
Case Studies illustrated focus on therecent changes and trends intechnology and they are an addedflavour to this textbook which servesthe reader an insight into the latesthappenings in the business world. Thechapters begin with an openingcase especially in Indian context andthen further discusses the relevanthypothesis which seems to be a goodapproach for the students to get a clear
T
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idea. It would have been beneficial if chapter objectives as
well as chapter summary too are included in each of the
chapters.
The second part of the book emphasis on MOT’s
interdisciplinary nature, risks associated and various ways
to mitigate risks as well as the significance of diffusing the
technology in the market at an appropriate time to build a
competitive advantage and to avoid strategic drift.
The third part of the book offers a comprehensive view by
providing MOT guidelines for improving and sustaining a
nation’s as well as a firm’s competitiveness and the importance
of economic and financial policies of a system to go hand inhand with the technology for progressing in the path of wealthcreation. It also examines the issues associated with the processof technology acquisition and technology transfer.
The final section of the book provides examples from firmsacross the globe illustrating on how the technology should bemanaged and how organizations are managing and also howsome others are struggling to survive in this era of technologyrevolution.
This is an excellent course book for management students tolearn the significance of technology management in business.
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Reviewed by Dr.C.Sengottuvelu, CPM (USA)Professor and Head-ConsultancySCMS Cochin School of Business
Prathap Nagar, Muttom, Aluva-683 106,Ernakulam, Kerala, India.
Book Title : Cases in Strategic Management: Volume IIAuthor : Amita MitalEdition : Edn-2013ISBN 13 : 978-1-25-900511-4ISBN 10 : 1-25-900511-9Pages : 237Publisher : Tata Mc Graw Hill Education Pvt. Ltd., New Delhi
he book under review titled Cases in Strategic
Management (Volume II) is written by Amita Mital,
a Professor in Strategic Management Area, IIM
Lucknow, who also had worked in the industry for a numberof years before moving to academics.
This book consists of 12 cases drawnfrom various industries ranging fromglass, paper, IT services/mediabusiness, auto components, bio-technology, musical products ,consumer products, sports ,horticulture/floriculture, bankingservices, gold jewellery and coffee,besides a brief introduction to casestudy approach in managementeducation teaching, need and types ofcases, strategic management cases etc.This case book volume II is certainlybringing more content from Indianindustries to class.
Case -1: The case is introduced with
a brief history of Piramal Glass
Company, one of the top three global
glass companies. This also deals with the dynamics of glass
industry, business segments, manufacturing capacity, and
financial performances of Piramal Glass.
The case is suitable for explaining how to enhance
firm’s profi t pools by diversifying into product and
technology and designed for learning Strategic Choice and
Analysis module of Strategic
Management Course.
Case-2: The case describes
the growth of Ballarpur Industries
Limited (BILT); a Thaper group of
Companies, started business for the
manufacture of paper in 1945 and
diversified into many businesses
including vanaspati, chemicals, tin
containers , soaps, and glass
containers.
The case brings out the importance
of analyzing and understanding the
firm’s external environment, Porter’s
five competitive forces and how they
determine the profi t potential ,
turnaround strategies etc.
T
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The case portraits lot of details with regard to classification
of paper products, BILT’s plant capacity, and comparison on
sales, assets & profits of BILT vs Industry, impact of import
duties on procurement of materials etc.
The case is designed to understand key aspects of Strategic
manufacturing, technology, Marketing, Human Resource,
International presence, competition etc. This case carries lot
of information on income statement, balance sheet of Pidilite
and also its competitors like Nikhil Adhesives, Camlin etc.
The case is designed for learning incremental Innovations in
gaining first mover advantage. This case also enables to create
SCMS Journal o f Indian Management , July - September, 2013 114
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a concept of corporate advantage as proposed by
contemporary authors on Strategic Management.
Case-8: The case star ts with a brief history of
Commonwealth Games, Commonwealth Games Federation
(CGF), part icipat ion of various organizat ions, CGF
organization structure, various committees, creation of
infrastructure, promotional act ivi t ies , entering into
partnerships, coordination, resources and controls, event
management, security, hospitality etc. In a way, conducting
this mega game was considered as important event from
Country’s point of view. It was estimated that the 19th
Commonwealth Games would result in an economic impact
of approximately USD 5 Billion (Rs. 29,000 Cr & later on
enhanced).
The case is designed to identify the key processes, and
activities critical to organizing the games successfully and
roadmap with timelines to exercise control over time and cost.
Case-9: The case outlines the growth of a Company in a
global floriculture industry with drastic changes in demand
and supply. The interesting part of case is floriculture retail,
cut roses production cycle, supply chain, business model of
Karuturi Global, summarized balance sheet and income
statement (for 10 yrs- 2001 to 2010) etc.
The case is designed for understanding key aspects of
diversification strategies, business level strategy, operational
strategy, international strategy in agriculture business, and
implementation issues.
Case-10: The case is introduced with a brief history of Bank
of Baroda (BoB); a top nationalized Bank which enhanced its
presence across the country with many good initiatives and
practices. They also give a broad picture about the bank’s
growth over a period of time. This case introduces Gartner’s
envisioned business strategy, transformation with passion-
Parivartan, Employees with high potential- Khoj, initiatives
on sustainable performance, risk management etc. The data
on income statement, balance sheet, operating income,
administrative expenses etc for 10 years are very useful for
analysis.
The case are enumerates challenges and issues related to
organizational growth, life cycle approach, products and
services with regard to banking industries.
Case-11: The case deals with the largest gold product
exporting company in India and largest manufacturer of gold
jewellery in the world- Rajesh Exports Limited (REL). This
is a partnership company formed in 1990 with an objective
to manufacture and export gold jewellery. The case also
describes the integrated manufacturing, R&D, Marketing,
Distribution, HR, Financial Management, Competition etc.
The interesting part of case is Panch Mantra proposition for
Shubh Retail, which deals with 5 pillars.
The case is designed for understanding internal analysis,
Porter’s generic value chain, competitive strategies, integration
strategies, etc.
Case-12: The case deals with Strategic Alliance between
Starbucks and Tata Global Beverages Limited. The two
companies had been in a relationship since 2004, when
Starbucks signed a pact with Tata Coffee for supply of coffee
beans. Tata Starbucks Limited was formed with an equal stake
Joint Venture (JV) to launch 30-50 outlets in India with an
initial investment of Rs.4 Billion to be split equally. The case
highlights the operations of companies, strategies, product
portfolio, and financial performance during 2006-11 (5 years).
The case enumerates Strategic Alliances, Joint Venture, value
creation for partners in an alliance etc. The case is being
discussed in the class for analyzing the strategic alliance
related issues, and competition with global leaders in
international emerging markets.
These 12 case studies will certainly meet the changing needs
to their readers considering the global scenario on Strategic
Management. Each case is loaded with full of data and useful
for conducting quantitative analysis in Strategic Management.
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ISSN-0973-3167
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Mahdi Salehi and Farhad Rana Varnosfaderani
Family Conflict Resolution : Purchase role of Urban WomenAnilkumar and Jelsey Josph
Non - performing Assests : PSBDr. R. Velmurugan
Vegetable Price Rise : Rythu Model Solution Prof. Subhendu Dey and Dr. Salma Ahmed
Organizational Flexibility Real Option ApproachProf. Pankaj M. Madhani
Random Walk Behaviour : Indian Equity MarketP.K. Mishra
Management Accounting Benefits : ERP EnvironmentMahesha V. and Akash S.B.
Household Incom : Potential EntrepreneurPurna Prabhakar Nandamuri and C.H.Gowthami
Enhancing Organizational Perfromance : Indian IT Sector Iliyas Mohammed
Stress Symptoms : Structural Equation ModellingG.S. David Sam Jayakumar and A. Sulthan