ارتباط بین تصمیمات مالی شرکت و عملکرد واقعی بازار : مطالعه پانل بخش شرکت های بزرگ هند

We examine the relationship between quality and reputation signals and firm's product market performance at empirical level. Using data of 533 Indian listed firms over the period 1989–2000, we compare the behavior of top 50 business group firms with the small group and private standalone firms. The empirical results suggest that real market signals like advertisement, marketing, distribution, research and development, ISO third party quality certifications significantly affect firms’ performance. Financial decisions by firms in the capital market like issue of commercial paper and debentures may also act as additional signals of firm specific qualities in the product market. For instance, the total sales go up by 2.4% for top 50 business group firms and by 2.5% for non-top 50 firms with a one standard deviation increase in commercial paper as a fraction of assets. Similarly, an increase in debentures relative to assets leads to 9.5% increase in sales for non-top 50 firms in comparison to a 4.7% increase for top 50 firms. We also find that DFI lending helps firms increase expenditure on advertising for product promotion, build distribution networks, increase marketing efforts and research and development, and thereby, boost sales growth significantly in the long run. From regression results and various univariate tests, we find strong empirical evidence that firms’ financial decisions drive product market outcomes.

With the removal of all quantitative restrictions on imports and falling import tariffs under the WTO regime, Indian manufacturing companies are now facing the challenges of international competition both at home and abroad. As a result, aspects like productivity, efficiency, quality and competitiveness rather than just the price of the product have come to the forefront. Indian companies are taking full advantage of falling trade barriers and increasing market access that the new era of globalization has provided. Thus, it has become crucial for them to recognize the importance of quality and reputation as necessary requirements for long-term survival in today's competitive world. One of the primary problems that firms face in the product market is that of information asymmetry. When true quality of a product is not known before purchase, consumers may rely on a firm's reputation to form expectations about the product's quality. Since it is impossible to ascertain firm quality before purchase due to the presence of information asymmetry, buyers seek and good quality sellers send credible signals of quality. Under conditions of such uncertainty, potential exchange partners experience greater transaction risk with regard to the actual quality of the product or service that is being exchanged (Akerlof, 1970). Firm reputation is an important uncertainty reducing mechanism in such environments for promoting its sales (Klein & Leffler, 1981; Shapiro, 1983 and Allen, 1984). Advertising is one such costly signal that can be viewed as an investment in reputation building by the firms (Nelson, 1974, Shapiro, 1983 and Allen, 1984; Milgrom & Roberts, 1986). Firms use advertising through television or radio or newspaper to inform potential consumers about the existence, characteristics and prices of the commodities they offer. Shapiro (1983), in his classic article, argued that high-quality producers have more incentives to incur the costs of investing in reputation building through advertising because they more likely to generate repeated purchases. Nelson's (1974) crucial insight was that if high-quality brands advertise more and if advertising expenditures are observable, then rational and informed consumers would respond positively to advertising even if it does not have much direct informational content. Spending an astronomical amount of money on the ad campaign transmits the information that the firm wants to establish reputation with the intention of staying in the market for a longer time. Hence, enterprises with advertising and promotional activities are likely to do better in the product market. Firms may use ISO quality certification from a third party underwriter, as a signaling device in markets where consumers rely on information specialists and experts to screen various products to ascertain their quality. Quality certification signals that the firm maintains a quality system and is concerned with customer expectations and satisfaction, and thereby, raises their willingness to pay for it. Similarly, in order to sustain competitive advantages in the domestic market as well as in the foreign market, companies need to establish marketing and distribution networks in enhancing their sales operation. R&D is also a performance promoting activity as it improves both the product quality and process quality. The firm's decisions on R&D activities are explicitly seen from the strategic point of view. Firms with large R&D expenditure may move to the forefront of the technology boundary in their market when they invest in new products or new production processes. Therefore, a firm can increase its market share by spending on R&D, especially in a much more competitive export market where competition is mostly on the technology front. Finally, the value of reputation to observers derives from the summary and synthesis of the past behavior of firms (Shapiro, 1982 and Shapiro, 1983). Firms may engage in activities that enable them to borrow reputations from others, mainly a third party (viz. commercial banks, development financial institutions).1 New public firms as well as the established firms borrow reputation from their underwriters by issuing short-term securities like commercial paper and fixed interest carrying debentures to have better credibility in the product market. Financial intermediaries have a comparative advantage in monitoring borrowers because bankers have economies of scale in obtaining information (Diamond, 1984). In the presence of asymmetric information about borrowers, good quality firms (with higher credit rating) may choose short-term debt because they will be able to take advantage of the revelation of future good news (Diamond, 1991 and Diamond, 1993). This positive information effect outweighs the liquidity risk of not being able to refinance oneself and running the risk of being liquidated by the lender. On the other hand, less creditworthy firms will issue longer-term debt. Further, short-term debt may also increase the efficiency of firms because of its role in disciplining management (Jensen, 1986). Because of the more continuous scrutiny of a firm's operations and the threat of liquidation, short-term debt instruments may in fact constrain wasteful activities. Economic policy makers have traditionally held the view that, due to capital market imperfections, there is a shortage of long-term finance and that this acts as a barrier to industrial performance and growth. This belief has led to the establishment of development financial institutions in India to help firms that are financially constrained and that are not able to raise funds to undertake projects.2 Long-term finance is thought to allow firms to invest in more productive technologies, even when they do not provide an immediate payoff, without the fear of premature liquidation. However, short-term finance may have better incentive properties compared with long-term finance, because it allows suppliers of finance to monitor and control firms more effectively, with favorable effects on firms’ performance. In this context, we separately assess the product market impact of long-term DFI loans and short-term financial instruments like debentures and commercial paper that are backed by bank guarantees. The established firms in the market enhance their reputations through strategic partner selection by forming business groups. Thus, associations with highly regarded actors can also help firms build reputations. In a developing country like India, the presence of information asymmetry prevents the financial market from operating efficiently. Therefore, business groups may act as an intermediary between firms and markets. From a theoretical perspective, business group affiliation can act as a good signal of firm quality in the product market due to the existence of financial ties between affiliated firms. These relationships take the form of cross-holding of equity, inter-firm loans, or mutual debt guarantees. These financial linkages may serve to mitigate moral hazard problems within the group (Berglof & Perotti, 1994) and can restrict cheating through risk sharing. Therefore, in the presence of asymmetric information, group membership can act as a signal of relative stability in the firm's cash flows, reducing the harmful effects of adverse selection (Gangopadhyay, Lensink, & Molen, 2001). Together with the existence of debt guarantees, it may reduce the probability of financial distress. Studies covering various countries find that firms associated with business groups show better financial performance and productivity as well as risk sharing than unaffiliated firms. Khanna and Palepu (2000) find that membership in a large business group in India makes a company more likely to able to issue global depository receipts (GDRs), enter into foreign collaborations and be scrutinized by the equity analysts. Accordingly, we hypothesize that top 50 business group firms may have a better reputation advantage in the product market than the non-top 50 business group firms.3 We explicitly look at the effect of business group affiliation on firm sales. The challenges Indian firms face in the export market are quite different from those in the domestic market. In the domestic market, Indian buyers are price sensitive rather than quality sensitive. But the foreign consumers may be reluctant to buy the imported product, if it is of inferior quality in comparison to the locally produced brands. Therefore, firms reckon quality as prime instrument for entry into competitive global and regional markets. To move up the value chain, Indian exporters need to manufacture according to global standards, upgrade technology to reduce cost to keep pace with international competitors and be more aggressive. Therefore, investment in research and development for product innovation and ISO third party quality certification may act as crucial signaling device for exporting firms.4 However, the organized players with an established brand name in the domestic market may depend more on advertising and marketing for promoting their products. We compare the behavior of firms (both group and non-group) in the foreign and domestic market. In this context, the empirical question we have set is: “Do the product and financial market signals operate differently for domestic sales and foreign sales?” In order to answer this, we split total sales of a firm between domestic and foreign sales and test the significance of real and financial signals separately. We estimate panel logit and tobit models with a sample of 533 Indian listed manufacturing companies between 1989 and 2000. The main purpose of this paper is to test the connections between financial instruments, real market signals and firms’ product market performance. We test the significance of these signals on firms’ total sales as well as domestic and foreign market sales using panel logit and panel tobit regression models. Unfortunately, this one-equation regression might suffer from the problem of regressors’ endogeneity. This implies that we cannot identify the cause–effect relations. Therefore, in order to determine these effects correctly, we examine these connections through various univariate tests on real market variables consequent upon the issuance of financial securities, exploiting our panel data set. By doing so, we present empirical evidence on the linkage between a firm's financing decisions and its subsequent behavior in the product market. Finally, we test the causality between financial instruments and exports. Our empirical results show that issuance of commercial papers or debentures by firms leads to better performance in the product market; while it directly impacts domestic sales of the firms, it also acts as a signal and stimulates foreign sales. Their effects are economically significant for both the top 50 and non-top 50 groups of firms. The total sales go up by 2.4% for top 50 business group firms and by 2.5% for non-top 50 firms with one standard deviation increase in commercial paper relative to assets. Similarly, an increase in debentures relative to assets leads to 9.5% increase in sales for non-top 50 firms in comparison to a 4.7% increase for top 50 firms. We also look at long-term DFI loans and find that they positively affect long-term sales of firms. Calculating the economic significance of the impact of DFI borrowing, we find that growth of sales rises by 39–50% for smaller group or private standalone firms in comparison to 25–30% for firms belonging top 50 and large business groups. Moreover, other product market signals such as advertising, marketing intensity and ISO certification also positively affect firm sales, both foreign and domestic. We find with a one standard deviation increase in advertising intensity, total sales go up by around 3% for top 50 business group firms in comparison to a 1% increase of their non-top 50 counterparts. Thus, overall, the results of our paper strongly argue that financial market decisions (issuance of commercial paper and debentures and obtaining DFI loans) and other product market signals (advertising, ISO certification, etc.) by Indian firms drive their product market performance. Thus, we find empirical evidence in support of the interaction of the firm's financing decision and product market behavior. The rest of the paper is structured as follows. In the next section, we portray how the financial instruments act as signals of firm quality and have interaction with the product market. Here, we give a brief survey of the existing literature on the interaction of firm's financing decisions with the product market performance. The third section lays out data, construction of variables and descriptive statistics. The fourth section presents the results and methodology based on the hypotheses that have been discussed in Sections 1 and 2. The fifth section discusses the main conclusions. Tables are given at the end of the paper along with a list of variables and their definitions.

The primary contribution of the research delineated in this paper is to demonstrate the importance of corporate quality and reputation building activities for competing in the product market in the context of India. From our regression results, we find a positive relationship between the firm's issuance of short-term securities and product market sales. From univariate tests, we find commercial paper and debenture issuing firms strategically using them to ease capacity constraints, build distribution networks, engage in product innovation, increase marketing efforts, or promote their products through increased advertising to expand sales opportunities. Thus, firms can use short-term financial instruments like commercial paper and debentures for strategic purposes to gain competitive advantage in the product market. While these short-term securities can give issuing firms a strategic advantage in the domestic market, they may also act as signals of firm-specific quality to customers or distributors as well as marketing agents, and thereby stimulate foreign sales. We also evaluated the role of long-term loans from development financial institutions on firm performance. DFIs in India have been set up apparently to help firms that are financially constrained to undertake socially desirable projects. Accordingly, we find that DFI loans positively affect total sales (mainly domestic sales) for non-top 50 group firms who are more financially constrained than the top 50 business group affiliated firms. However, DFI loans are long term in nature. In order to capture its effect on performance properly, we looked at its consequence for a longer period of time. Our univariate results on yearly changes in performance variables reveal that both category firms utilize DFI loans in increasing expenditure on advertising, distribution, marketing and research and development to increase its market share in the long run. Finally, we used two- or three-period lagged values of DFI loans over assets for the firms that have taken the loan on growth of sales. We find that DFI lending boosts sales growth in the long run. Therefore, the empirical results support our claim that financial market decisions by corporations drive their product market performance. With regard to real market signals, we find that firms that are spending more on advertising and marketing for brand promotion become successful in overseas markets. Improvement in quality is a prerequisite for establishing market dominance abroad. Expenditure on R&D is crucial as it significantly improves export share especially for the firms belonging to top 50 business group. Further, quality certification plays an important role in inducing foreign customers into buying a firm's products. Moreover, firms are more likely to export if they are top 50 group firms again suggesting that quality matters for export. Group reputation matters in the export market since it reduces uncertainty among the foreign customers about firm quality. The top 50 business group firms on average spend more on advertising, marketing, distribution and R&D, and thus have larger amount of intangible assets. Therefore, they are generally high-quality firms with greater growth options in their investment opportunities in comparison to their counterparts. For independent or smaller group firms, distribution is an important factor in determining higher export probability. In the domestic market regressions, we find that firms spending more on advertising and marketing experience more rapid growth of sales. This is true for top 50 business group affiliates. Top group firms already have more established reputation in the domestic market. Therefore, for them, high ratios of advertisement and distribution to sales may be good at establishing entry barriers against competition. For the independent and smaller group firms, we find that expenditure on marketing significantly improves their performance in the domestic market. We, however, find that R&D intensity has no effect on domestic sales for both categories of firms while it is significant for exports. This may be due to two reasons: firstly, the degree of competition on the quality front is quite low in the domestic market in comparison to the international market. This is due to multiplicity of sellers and easy entry into the market, which destroy incentives for maintenance of high qualities. Secondly, unlike the export market, domestic consumers in India are not much quality conscious.