Empirical Evidence of Relationship between Contingent Liability and Market Capitalization
Keywords:
Contingent liability, Market capitalisationAbstract
In this paper an attempt is made to analyze and quantify the relationship between contingent liability and market capitalization of a listed company. For this a sample of 915 companies listed on NSE was studied over a period of five years (April 2013 – March 2018) and variables used were contingent liability, sales turnover, market capitalization and PAT. Descriptive analysis, correlation, regression, and panel data regression were used for analysis. A positive significant relationship was observed between PAT and Market Capitalisation and between CL and Market Capitalisation. An increase in CL/ST ratio resulted in a fall in market capitalization in majority of the cases of analysis, however the converse was not observed.For both year-on-year regressions and panel regressions adding contingent liability to list of predictors improved the percentage variation explained by model. However contrary to expectations, tests do not validate a negative causal relationship between contingent liability and market capitalization.
References
Bhardwaj, S. (2012). Does Contingent Liability Affect the Stock Price?, Economic Times, September 24 2018, https://economictimes.indiatimes.com/does-contingent-liability-affect-the-stock-price/articleshow/16503193.cms?from=mdr.
Bhardwaj, S. (2018). 7 Stocks wealth with Declining Contingent Liabilities and Highest Upside Potential, Economic Times. September 18 2018.
Brown S. and Hillegeist, S. A. (2007). How Disclosure Quality Affects the Level of Information Asymmetry, Review of Accounting Studies, vol. 12 No. (2-3) pp. 443–477.https://link.springer.com/ article/10.1007/s11142-007-9032-5
Burnside Craig (2004). Currency Crisis and Contingent Liabilities, Journal of International Economics, 62. 25-52. https://dukespace.lib.duke.edu/dspace/bitstream/handle/10161/1901/Burnside_currency_crisis_and _contingent.pdf.
Chang M. D` Anna, G.Watson I. and Wee, M. (2008). Does Disclosure Quality via Investor Relations Affect Information Asymmetry?, Australian Journal of Management, vol. 33 NO. 2 PP 375-390. https://journals.sagepub.com/doi/abs/10.1177/031289620803300208
Healy P. Hutton, A. and Palepu, K. (1999). Stock Performance and Intermediation Changes Surrounding Sustained Increase in Disclosure, Contemporary Accounting Research vol. 16 pp. 485-520. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1911-3846.1999.tb00592.x
Lacy J. Y. (2002). Probability Expression and Ambiguity: An Experimental Study of Disclosure Perceptions for Contingent Liabilities, PhD Thesis, George Washington University.
Main, D. and B, S. and M S A. (1990). Auditor Decision Making Ander Ambiguity: A Test of the Einhorn and Hogarth Ambiguity Model, Working paper School of the Ohio state University. https://etd.ohiolink.edu/!etd.send_file?accession=osu1265296896&disposition=inline
Raja DarabiI, Mehdi Fagani (2012). The Disclosure Effects of Contingent Liabilities and Ambiguities on Making Decisions by Users of Financial Statements, International Journal of Business and Commerce, 9 pp.https://www.ijbcnet.com/1-5/IJBC-12-1504.pdf
