FTSEs Capital Structure and Profitability Relationship

FTSEs Capital Structure and Profitability Relationship The capital structure of a firm has long been a much debated issue for academic studies and in the corporate finance world. It is the way a firm finances its assets through some combination of equity, debt, or hybrid securities the composition or structure of its liabilities. In reality, capital structure may be highly complex and include various sources. The question whether capital structure affects to the profitability of the firm or it is affected by profitability is crucial one. Profitability and capital structure relationship is a two way relationship. On the one hand profitability of firm is an important determinant of the capital structure, the other hand changes in capital structure changes affect underlying profits and risk of the firm. Traditionally it was believed that the debt is useful up to certain limit and afterwards it proves costly. There is an optimum level of capital structure exist up to that level increasing debt will improve profitability, beyond that it will reduce profitability. In 1945, Chudson carried out an extensive study that implies the possibility of a relationship between the capital structures practised by a firm with its profitability. The question he endeavours to answer was that, à ¢Ã¢â€š ¬Ã…“In what way does the structure of assets and liabilities of a firm reflect the kind of industry in it is engaged, its size and level of profitability?à ¢Ã¢â€š ¬? In 1958 Merton Miller and Franco Modigliani in their famous Miller-Modigliani (MM) propositions put forward the net operating income approach of and demonstrated that the capital structure is irrelevant in a perfect market. It states irrelevant of capital structure in a perfect market to its value, hence, how a firm is financed does not matter. The MM propositions forms the basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it is based on perfect market assumptions those are not prevailing in practice. The matter of capital structure has gained much interest and controversy, since the MM Propositions which assert that the value of a firm is independent of its capital structure. The hypothesis proposed by MM created tidal waves in the corporate finance academia. Different theory such as packing order theory and agency cost theory were proposed. Various aspects of capital structure have been put to test and researched by so many researchers. The question is if the capital structure is really irrelevant in a real market and whether a companys profitability and hence value is affected by the capital structure it employs? If not, why capital structure is relevant and which factors make the leverage matter? Apart from profitability, some other factors such as bankruptcy costs, agency costs, taxes, and information asymmetry are considered in determination of capital structure. This study aims and attempts to extend the knowledge of capital structure and profitability relationship in listed UK companies. This analysis can then be extended to look at whether there is in fact an optimal capital structure exist the one which maximizes profitability and hence the value of the firm. 1.1 Context and relevance of the Study The topic of capital structure has been widely explored, though the study is relevant in the different time period and different context to find out whether the evidence concerning the capital structure issue and its various aspects are relevant to a given set of companies in a given period. Given this significance, current study attempts to understand and research on capital structure and its effect on profitability, of large firms in UK in the present context for a period of five years (2005 -2010). Thus, this study attempts to contribute to the research on capital structure in the recent period for large publicly traded companies on FTSE 100. 1.2 Research Objectives The present study is aimed at achieving one main and two secondary objectives. The main objective is to scrutinise the relationship between the capital structure and profitability of the large publicly traded UK firms and to ascertain whether a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s profitability is related with its capital structure or not based on the empirical evidence generated. Secondly, this study would attempt and investigate to determine if any optimal capital structure exist among the sample of FTSE 100 listed companies. Third objective is to find out any trend of capital structure being exhibited by the UK companies. 1.3 Research Questions and Hypothesis The above objectives are translated in two research question. The main research question is that whether a firms profitability is related with its capital structure or not based on the empirical evidence generated. Hypothesis The first questions can be presented as following hypothesis. The present study shall be undertaken to evaluate this hypothesis based on the tests of the null hypothesis. H1: The profitability of a company is significantly correlated to its capital structure. H0: The profitability of a company is not significantly correlated to its capital structure. The secondary objectives of this study are translated in the determinant question regarding the optimality and trend of capital structure. The second question, will be discussed descriptively is that, Is there an optimal capital structure exists among or any trend of capital structure being exhibited by FTSE 100 listed companies? 1.4 Scope and Limitations of the Study Scope This is an academic study that would shed some light on the matter of capital structure which has been discussed in various different perspectives since the MM propositions. The significance of this study is that it further enhances the research into capital structure of listed firms in UK. Profitability and Capital structure relationship is an ongoing issue and its relevance may change in different period because of the changes in macro and micro economic factors. For practitioners and corporate finance people such as finance executives, controllers and directors of listed firms, this study is relevant and of much interest to get insight of the capital structure and whether it has any effect on the profitability. Limitations The findings of this study will be limited from the following aspects: This study included only FTSE 100 listed firms on the London Stock Exchange (LSE). Hence, its findings were not applicable for all the listed companies in UK. The sample of listed companies for this study included only firms with at least five years of financial data. Firms which are younger than five years or whose five year data could not be obtained will not be included in this study. The study excludes financial utility and other highly regulated industry to avoid any distortions in the result due to industry specific requirements. The cross sectional correlation and regression analysis will be performed using excel formula. CHAPTER 2 LITERATURE REVIEW The various capital structure theories are developed by corporate finance academia for analysing how a firm could combine the securities to maximise its value. The Modigliani and Miller (MM) proposition (1958) were introduced under the perfect capital market assumptions. It refers to an ideal market where there are no taxes at both corporate and personal level, no transaction costs, no agency costs as and managers are rational. It further assumes that investors and firms can borrow at the same rate without restrictions and all participants have access to all relevant information. Thus it provides conditions under which the capital structure of a firm is irrelevant to total firm value. Most of studies focus on the determination of capital structure i.e. to what extent each of the assumptions in the MM model contributes to the determination of the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure. Many theories such as the pecking order theory, the trade-off theory and the agency cost theory have been developed. Though much attention was not given to one major aspect of the capital structure, which is the impact of the value of the firm. The value comes from the future cash flow i.e. profit of the firm. Thus capital structure affects value of the firm through the profitability and hence there is a direct relationship between the capital structure and profitability of the firm. Capital Structure The term capital structure can be defined as: à ¢Ã¢â€š ¬Ã…“The mix of a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s permanent long-term financing represented by debt, preferred stock, and common stock equity.à ¢Ã¢â€š ¬? (Van Horne Wachowicz, 2000, p.470) It can be defined as à ¢Ã¢â€š ¬Ã…“The mix of long-term sources of funds used by the firm. This is also called the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s à ¢Ã¢â€š ¬Ã…“capitalizationà ¢Ã¢â€š ¬?. The relative total (percentage) of each type of fund is emphasized.à ¢Ã¢â€š ¬? (Petty, Keown, Scott, and Martin, 2001, p.932) One of the exhaustive and inclusive description was given by Masulis (1988, pl): à ¢Ã¢â€š ¬Ã‹Å"Capital structure encompasses a corporationà ¢Ã¢â€š ¬Ã¢â€ž ¢s publicly issued securities, private placements, bank debt, trade debt, leasing contracts, tax liabilities, pension liabilities, deferred compensation to management and employees, performance guarantees, product warranties, and other contingent liabilities. This list represents the major claims to a corporationà ¢Ã¢â€š ¬Ã¢â€ž ¢s assets. Increases or reductions in any of these claims represent a form of capital structure change.à ¢Ã¢â€š ¬? However in this study, for the sake of simplicity, the capital structure will be analysed in term of debt and equity in line with other prominent capital structure studies and theories restricted to the debt equity mix. Profitability The term profitability is a very common term in the business world. It refers to an all round measurement and indicator for a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s success. Profitability can be defined as the ability of a firm to generate net income or profit on a consistent basis. It is often measured by price to earnings ratio. The accounting definition of profit can be given as the difference between the total revenue and the total costs incurred in bringing to market the product i.e. goods or service. Hence, profitability had come to mean different things for different people. It can be defined and measured in several ways depending on the purpose. It is a generic name for variables such as net income, return on total assets, earnings per share, etc. though the simplest and common meaning of profitability is the net income. 3.1 Early Study on Capital Structure by W A Chudson One of the earliest comprehensive researches into capital structure of business firms was done by Chudson Walter Alexander (1945) on a cross section of manufacturing, mining, trade, and construction companies in the US from the year 1931 to 1937. Although it has been more than two third of a century, that study is still relevant today as before due to the seven questions which he endeavoured to answer. Out of those questions the relevant to this study are as follows. In what way does the structure of assets and liabilities of a given concern reflect the kind of industry in which a concern is engaged, the concernà ¢Ã¢â€š ¬Ã¢â€ž ¢s size and level of profitability? Are there any elements in the corporate balance sheet, either on the asset or the liability side, whose range of variation is so narrow that it is possible to speak of a à ¢Ã¢â€š ¬Ã…“normalà ¢Ã¢â€š ¬? pattern of financial structure? The questions posed by Chudson could be interpreted into the research questions pertinent to this study which are the relationship between profitability and capital structure, the existence of an optimal capital structure, and also the trend of capital structure being practised by a sample of firms. Chudsonà ¢Ã¢â€š ¬Ã¢â€ž ¢s research showed there were undisputable relationships between corporate financial structure and the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s profitability. As far as this study is concerned, Chudson had successfully proved the relationship between the profitability of a company with various capital structure variables including debt and equity capital. 3.2 M M Propositions In 1958 Merton Miller and Franco Modigliani in their famous Miller-Modigliani (MM) propositions put forward the net operating income approach of and demonstrated that the capital structure is irrelevant in a perfect market. Accordingly, the first Proposition holds that the value of a firm is independent of its capital structure. While the second proposition stats that when first proposition held, the cost of equity capital was a linear increasing function of the debt/equity ratio. As miller wrote subsequently these propositions implied that the weighted average of these costs of capital to a firm would remain the same no matter what combination of financing sources the firm actually chose. (Miller, 1988) In 1962, Barges tested and evaluated the MM propositions predominantly on the validity of the hypothesis that the cost of capital to the firms is unaffected by capital structure. According to Barges (p. 143): à ¢Ã¢â€š ¬Ã…“With respect to the empirical methods employed by MM it was found that, under very frequently encountered conditions, their methods will result in tests which are biased in favour of their propositions and biased against the traditional views.à ¢Ã¢â€š ¬? Barges had empirically proved the existence of some weaknesses in the research design and methodology of Modigliani and Millerà ¢Ã¢â€š ¬Ã¢â€ž ¢s study and concluded that (p. 147) à ¢Ã¢â€š ¬Ã…“Thus, on the basis of the evidence presented herein, the hypothesis of independence between average costs and capital structure appears untenable.à ¢Ã¢â€š ¬? Subsequently many studies were conducted with focus on the determination of capital structure and many theories were presented. 3.3 Profitability and Leverage theories Since MM propositions presented, many studies were conducted by releasing MM assumptions focusing on the extent to which each of the assumptions contributes to the determination of the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure. All these theories explains the relationship between leverage and the value of the firm and hence profitability of the firm. There are various theories in order to further explain this relationship. Nevertheless, these theories are actually based on asymmetric information (Myers, 1984), tax deductibility (Modigliani and Miller, 1963; Miller 1977), Bankruptcy costs (Stiglitz, 1972; Titman, 1984) and agency costs (Jensen and Meckling, 1976; Myers, 1977). Two main theories are the pecking order theory and the trade off theory. Pecking Order Theory The Pecking Order Theory is based on information asymmetry between management and investors. So, the stock price of a firm may not reflect correct value of the firm. Myers and Majluf (1984) and Myers (1984) suggest that management issue the security which is overvalued and therefore, undervalued firms tend to avoid issuing equity. They argue that in imperfect capital markets, leverage increases with the extent of information asymmetry. They provided theoretical support to Donaldsonà ¢Ã¢â€š ¬Ã¢â€ž ¢s (1961) findings that firms prefer to use internally generated funds as a financing source and resort to externals funds only if the need for funds was unavoidable. According to (Myers 1995), the dividend policy is à ¢Ã¢â€š ¬Ã…“stickyà ¢Ã¢â€š ¬? and the firms prefer internal to external financing. Firms prefer using internal sources of financing first, then debt and finally external equity obtained by stock issues. Therefore, asymmetric information models seldom point towards a well-defined target debt ratio or optimal capital structure. All things being equal, the more profitable the firms are, the more internal financing they will have, and therefore we should expect a negative relationship between leverage and profitability. The various studies such as Ross (1977), and Myers and Majluf (1984), Harris and Raviv, 1991; Rajan and Zingales, 1995; Booth et al., 2001have supported this relationship that is one of the most systematic findings in the empirical literature. Agency Costs Theory The Agency Costs Theory (Organizational Theory of Capital Structure) emphasize that capital structure was influenced by conflicts between shareholders and managers, and between debt holders and equity holders. Major study into this area was done by Jensen and Meckling (1976) that showed managersà ¢Ã¢â€š ¬Ã¢â€ž ¢ natural tendency to extract too many perquisites and stresses on self-interested behaviour. Obviously, agency costs would increase as the managersà ¢Ã¢â€š ¬Ã¢â€ž ¢ personal ownership stake in the firm decreases. This supplied an argument for debt financing and against à ¢Ã¢â€š ¬Ã‹Å"publicà ¢Ã¢â€š ¬Ã¢â€ž ¢ equity which was contributed by non management investors who cannot monitor management effectively. Fama and Miller (1972), using agency cost theory, proved that leverage was positively associated with firm value. Firms with longer credit histories would have lower cost of debt. The Trade of theory The trade-off theory is based on the considerations of benefits and the costs of debt. This theory argues that firms optimise their capital structure by trading the tax deductibility of interests, bankruptcy costs, and agency costs. This theory is consistent with traditional approach of capital structure. This theory leads to an opposite conclusion. Accordingly if the firms are profitable, they should prefer debt to benefit from the tax shield. Further as the past profitability is a good proxy for future profitability, profitable firms can borrow more because the likelihood of paying back the loans is greater. However after a certain level of leverage, the profitability and the value of the firm will reduce due to interaction of bankruptcy costs and agency costs. 3.4 Various Studies on Capital Structure As the issue of capital structure gained prominence and interest, a number of studies had been done over the years to explore the relationship between capital structure and a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s various characteristics e.g. growth opportunities, non-debt tax shields, firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s volatility, asset systematic risk, asset unique risk, internal funds availability, asset structure, profitability, industry classification, and firm size. This study is concerned particularly on the relationship between capital structure and profitability. Most of the studies had concluded that capital structure measured by debt/equity ratio had an inverse relationship with profitability measured by Return on Investment (ROI). Professor Myers of MIT had written in 1995 that à ¢Ã¢â€š ¬Ã…“the strong negative correlation between profitability and financial leverageà ¢Ã¢â€š ¬? is one of the à ¢Ã¢â€š ¬Ã‹Å"most striking facts about corporate financingà ¢Ã¢â€š ¬? (p.303). It is worthy to mention here that the aforesaid studies were the most comprehensive ever carried out in the US. One significant research was conducted by Bradley, Jarrell and Rim (1984) using Ordinary Least Squares method to analyze the capital structure of 851 industrial firms over a period of 20 years (1962-81). They concluded that an optimal capital structure actually existed as proposed by finance theorists. Bradley, Jarrell and Kimà ¢Ã¢â€š ¬Ã¢â€ž ¢s findings were supported by El-Khouri in 1989 who studied a sample of 1,040 Companies in US from 27 different industries covering a period of 19 years (1968-86). El-Khourià ¢Ã¢â€š ¬Ã¢â€ž ¢s major findings were that there exists an optimal capital structure, and profitability was significantly but negatively related to capital structure. 3.5 Rajan and Zingalesà ¢Ã¢â€š ¬Ã¢â€ž ¢ Study Rajan and Zingales (1995), in their study of determinant of capital structure find that profitability is negatively or inversely related to gearing consistent with Toy et al. (1974), Kester (1986) and Titman and Wessles (1988). Given, however, that the analysis is effectively performed as an estimation of a reduced form, such a result masks the underlying demand and supply interaction which is likely to be taking place. More profitable firm will obviously need less borrowings, although on the supply-side such profitable firms would have better access to debt, and hence the demand for debt may be negatively related to profits. Most of such studies were conducted in US using local companies and hence represents financing and profitability relationship in US economy and might not be applicable in other countries around the globe. Some of the studies conducted in UK as well though changing business and economic environment and time period may have their impact on such capital structure and profitability relationship. Further as discussed earlier much attention was not given to one major aspect of the capital structure, which is the impact on the profitability and hence the value of the firm. So understanding the effect of capital structure on the profitability and hence the value of the firm in the current economic and business environment is the main motivation for this study. CHAPTER 3 RESERCH FRAMEWORK I intend to use two major sets of variables (Ratios) i.e. Debt and Profitability to ascertain the relationship between the capital structure and profitability. The first set includes Gearing ratios Debt/Equity Ratio and Debt Ratio. The other set includes profitability ratios Return on Equity, and Return on Assets. The variables will be analyzed using the descriptive/time-series Correlation and regression technique. 2.1 Data Sample The data used for the empirical analysis will be derived from Hemscott database contains balance sheet, profit and loss and certain Key Ratio information for FTSE 100 companies in UK. For the purposes of this dissertation, I expect to utilise this data to obtain the required variables for all non-financial companies. 2.2 The Model and Research Methodology The following model outlines the framework for research. It consist two major components i.e. the profitability of a firm as the dependent variables and the capital structure of a firm as the independent variables. The arrow pointing to the right indicated the expected direction of causality. However profitability and capital structure relationship is a two way relationship. DEBT RATIO ROE DEBT/EQUITYRATIO ROA The model gave the foundation for analysis which was to explain the relationship among the two main groups of variables. In as much as possible, variables will be selected on the basis of the literature being reviewed. Thus, while this study is expected to give exciting results, there will be direct ties to earlier studies although may reflect the changing requirements of the time. One prominent issue here is the direction of the causality in the model. This research is based on the notion that the capital structure being practised by a firm would affect its profitability. This particular cause-and-effect relationship had been proved in various studies as found in the literature being reviewed. Though it should be kept in mind that there were a number of researchers who had argued that it was profitability which would influence the capital structure (Chudson 1945, Lamothe 1982, Bowen, Daley and Huber 1982). However, it is not within the scope of this study to determine the direction of causality in this particular relationship but rather to focus on the significance of such a relationship. 2.3 Variables In the first instance, great care was taken to define the dependent and independent variables to be used in the descriptive, co variance and regression analysis. As there are several alternative measures of profitability and gearing, only relevant measures are chosen for this cross-sectional analysis. Dependent Variable Profitability is dependent variable in this analysis and two measures of profitability employed in this analysis are Return on Equity (ROE) and Return on Assets (ROA). ROE is the return on equity and is measured as earnings before tax (EBT) divided by ownersà ¢Ã¢â€š ¬Ã¢â€ž ¢ capital or equity. ROE = EBT/EQUITY ROA is return on assets and is measured as earnings before interest and tax divided by total assets (Titman and Wessels, 1998; Fama and French, 2002 and Flannery and Rangan, 2006). The ratio of earnings before interest and tax (EBIT), to the book value of total assets (TA) ROA = EBITDA/TA Independent Variables Gearing Ratio represents capital structure. Therefore, in order to examine the sensitivity or otherwise of their cross-sectional results to the profitability following two ratios are used in this analysis and defined as: Debt to Total Assets: This is a simple ratio of total debt to total assets DEBT RATIO= TD/ TA Debt to Equity Capital: This is the ratio of total debt to capital, with the capital calculated as total debt plus equity, including preference shares. DEBT/EQUITY RATIO = TD / (TD + ECR + PS) PS the book value of preference shares. Research Plan and Implementation Schedule Research work starts from week beginning from October 4, 2010 and is expected to complete in 10 weeks time. The work is scheduled as follows. Research Plan Week Star Date : 04-10-2010 Week 1 2 3 4 5 6 7 8 9 10 Background reading and literature review X X Research design and plan X Choice of methodology X Gathering data X X X Data analysis and refine X X X Writing up draft X X X Editing final document X X Produce final document X Document passed to supervisor to read X Resources I intend to use following resources Hemscott database for data collection. MS Excel for analysing data. University of Wales online library, internet, and some books on finance. FTSEs Capital Structure and Profitability Relationship FTSEs Capital Structure and Profitability Relationship The capital structure of a firm has long been a much debated issue for academic studies and in the corporate finance world. It is the way a firm finances its assets through some combination of equity, debt, or hybrid securities the composition or structure of its liabilities. In reality, capital structure may be highly complex and include various sources. The question whether capital structure affects to the profitability of the firm or it is affected by profitability is crucial one. Profitability and capital structure relationship is a two way relationship. On the one hand profitability of firm is an important determinant of the capital structure, the other hand changes in capital structure changes affect underlying profits and risk of the firm. Traditionally it was believed that the debt is useful up to certain limit and afterwards it proves costly. There is an optimum level of capital structure exist up to that level increasing debt will improve profitability, beyond that it will reduce profitability. In 1945, Chudson carried out an extensive study that implies the possibility of a relationship between the capital structures practised by a firm with its profitability. The question he endeavours to answer was that, à ¢Ã¢â€š ¬Ã…“In what way does the structure of assets and liabilities of a firm reflect the kind of industry in it is engaged, its size and level of profitability?à ¢Ã¢â€š ¬? In 1958 Merton Miller and Franco Modigliani in their famous Miller-Modigliani (MM) propositions put forward the net operating income approach of and demonstrated that the capital structure is irrelevant in a perfect market. It states irrelevant of capital structure in a perfect market to its value, hence, how a firm is financed does not matter. The MM propositions forms the basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it is based on perfect market assumptions those are not prevailing in practice. The matter of capital structure has gained much interest and controversy, since the MM Propositions which assert that the value of a firm is independent of its capital structure. The hypothesis proposed by MM created tidal waves in the corporate finance academia. Different theory such as packing order theory and agency cost theory were proposed. Various aspects of capital structure have been put to test and researched by so many researchers. The question is if the capital structure is really irrelevant in a real market and whether a companys profitability and hence value is affected by the capital structure it employs? If not, why capital structure is relevant and which factors make the leverage matter? Apart from profitability, some other factors such as bankruptcy costs, agency costs, taxes, and information asymmetry are considered in determination of capital structure. This study aims and attempts to extend the knowledge of capital structure and profitability relationship in listed UK companies. This analysis can then be extended to look at whether there is in fact an optimal capital structure exist the one which maximizes profitability and hence the value of the firm. 1.1 Context and relevance of the Study The topic of capital structure has been widely explored, though the study is relevant in the different time period and different context to find out whether the evidence concerning the capital structure issue and its various aspects are relevant to a given set of companies in a given period. Given this significance, current study attempts to understand and research on capital structure and its effect on profitability, of large firms in UK in the present context for a period of five years (2005 -2010). Thus, this study attempts to contribute to the research on capital structure in the recent period for large publicly traded companies on FTSE 100. 1.2 Research Objectives The present study is aimed at achieving one main and two secondary objectives. The main objective is to scrutinise the relationship between the capital structure and profitability of the large publicly traded UK firms and to ascertain whether a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s profitability is related with its capital structure or not based on the empirical evidence generated. Secondly, this study would attempt and investigate to determine if any optimal capital structure exist among the sample of FTSE 100 listed companies. Third objective is to find out any trend of capital structure being exhibited by the UK companies. 1.3 Research Questions and Hypothesis The above objectives are translated in two research question. The main research question is that whether a firms profitability is related with its capital structure or not based on the empirical evidence generated. Hypothesis The first questions can be presented as following hypothesis. The present study shall be undertaken to evaluate this hypothesis based on the tests of the null hypothesis. H1: The profitability of a company is significantly correlated to its capital structure. H0: The profitability of a company is not significantly correlated to its capital structure. The secondary objectives of this study are translated in the determinant question regarding the optimality and trend of capital structure. The second question, will be discussed descriptively is that, Is there an optimal capital structure exists among or any trend of capital structure being exhibited by FTSE 100 listed companies? 1.4 Scope and Limitations of the Study Scope This is an academic study that would shed some light on the matter of capital structure which has been discussed in various different perspectives since the MM propositions. The significance of this study is that it further enhances the research into capital structure of listed firms in UK. Profitability and Capital structure relationship is an ongoing issue and its relevance may change in different period because of the changes in macro and micro economic factors. For practitioners and corporate finance people such as finance executives, controllers and directors of listed firms, this study is relevant and of much interest to get insight of the capital structure and whether it has any effect on the profitability. Limitations The findings of this study will be limited from the following aspects: This study included only FTSE 100 listed firms on the London Stock Exchange (LSE). Hence, its findings were not applicable for all the listed companies in UK. The sample of listed companies for this study included only firms with at least five years of financial data. Firms which are younger than five years or whose five year data could not be obtained will not be included in this study. The study excludes financial utility and other highly regulated industry to avoid any distortions in the result due to industry specific requirements. The cross sectional correlation and regression analysis will be performed using excel formula. CHAPTER 2 LITERATURE REVIEW The various capital structure theories are developed by corporate finance academia for analysing how a firm could combine the securities to maximise its value. The Modigliani and Miller (MM) proposition (1958) were introduced under the perfect capital market assumptions. It refers to an ideal market where there are no taxes at both corporate and personal level, no transaction costs, no agency costs as and managers are rational. It further assumes that investors and firms can borrow at the same rate without restrictions and all participants have access to all relevant information. Thus it provides conditions under which the capital structure of a firm is irrelevant to total firm value. Most of studies focus on the determination of capital structure i.e. to what extent each of the assumptions in the MM model contributes to the determination of the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure. Many theories such as the pecking order theory, the trade-off theory and the agency cost theory have been developed. Though much attention was not given to one major aspect of the capital structure, which is the impact of the value of the firm. The value comes from the future cash flow i.e. profit of the firm. Thus capital structure affects value of the firm through the profitability and hence there is a direct relationship between the capital structure and profitability of the firm. Capital Structure The term capital structure can be defined as: à ¢Ã¢â€š ¬Ã…“The mix of a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s permanent long-term financing represented by debt, preferred stock, and common stock equity.à ¢Ã¢â€š ¬? (Van Horne Wachowicz, 2000, p.470) It can be defined as à ¢Ã¢â€š ¬Ã…“The mix of long-term sources of funds used by the firm. This is also called the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s à ¢Ã¢â€š ¬Ã…“capitalizationà ¢Ã¢â€š ¬?. The relative total (percentage) of each type of fund is emphasized.à ¢Ã¢â€š ¬? (Petty, Keown, Scott, and Martin, 2001, p.932) One of the exhaustive and inclusive description was given by Masulis (1988, pl): à ¢Ã¢â€š ¬Ã‹Å"Capital structure encompasses a corporationà ¢Ã¢â€š ¬Ã¢â€ž ¢s publicly issued securities, private placements, bank debt, trade debt, leasing contracts, tax liabilities, pension liabilities, deferred compensation to management and employees, performance guarantees, product warranties, and other contingent liabilities. This list represents the major claims to a corporationà ¢Ã¢â€š ¬Ã¢â€ž ¢s assets. Increases or reductions in any of these claims represent a form of capital structure change.à ¢Ã¢â€š ¬? However in this study, for the sake of simplicity, the capital structure will be analysed in term of debt and equity in line with other prominent capital structure studies and theories restricted to the debt equity mix. Profitability The term profitability is a very common term in the business world. It refers to an all round measurement and indicator for a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s success. Profitability can be defined as the ability of a firm to generate net income or profit on a consistent basis. It is often measured by price to earnings ratio. The accounting definition of profit can be given as the difference between the total revenue and the total costs incurred in bringing to market the product i.e. goods or service. Hence, profitability had come to mean different things for different people. It can be defined and measured in several ways depending on the purpose. It is a generic name for variables such as net income, return on total assets, earnings per share, etc. though the simplest and common meaning of profitability is the net income. 3.1 Early Study on Capital Structure by W A Chudson One of the earliest comprehensive researches into capital structure of business firms was done by Chudson Walter Alexander (1945) on a cross section of manufacturing, mining, trade, and construction companies in the US from the year 1931 to 1937. Although it has been more than two third of a century, that study is still relevant today as before due to the seven questions which he endeavoured to answer. Out of those questions the relevant to this study are as follows. In what way does the structure of assets and liabilities of a given concern reflect the kind of industry in which a concern is engaged, the concernà ¢Ã¢â€š ¬Ã¢â€ž ¢s size and level of profitability? Are there any elements in the corporate balance sheet, either on the asset or the liability side, whose range of variation is so narrow that it is possible to speak of a à ¢Ã¢â€š ¬Ã…“normalà ¢Ã¢â€š ¬? pattern of financial structure? The questions posed by Chudson could be interpreted into the research questions pertinent to this study which are the relationship between profitability and capital structure, the existence of an optimal capital structure, and also the trend of capital structure being practised by a sample of firms. Chudsonà ¢Ã¢â€š ¬Ã¢â€ž ¢s research showed there were undisputable relationships between corporate financial structure and the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s profitability. As far as this study is concerned, Chudson had successfully proved the relationship between the profitability of a company with various capital structure variables including debt and equity capital. 3.2 M M Propositions In 1958 Merton Miller and Franco Modigliani in their famous Miller-Modigliani (MM) propositions put forward the net operating income approach of and demonstrated that the capital structure is irrelevant in a perfect market. Accordingly, the first Proposition holds that the value of a firm is independent of its capital structure. While the second proposition stats that when first proposition held, the cost of equity capital was a linear increasing function of the debt/equity ratio. As miller wrote subsequently these propositions implied that the weighted average of these costs of capital to a firm would remain the same no matter what combination of financing sources the firm actually chose. (Miller, 1988) In 1962, Barges tested and evaluated the MM propositions predominantly on the validity of the hypothesis that the cost of capital to the firms is unaffected by capital structure. According to Barges (p. 143): à ¢Ã¢â€š ¬Ã…“With respect to the empirical methods employed by MM it was found that, under very frequently encountered conditions, their methods will result in tests which are biased in favour of their propositions and biased against the traditional views.à ¢Ã¢â€š ¬? Barges had empirically proved the existence of some weaknesses in the research design and methodology of Modigliani and Millerà ¢Ã¢â€š ¬Ã¢â€ž ¢s study and concluded that (p. 147) à ¢Ã¢â€š ¬Ã…“Thus, on the basis of the evidence presented herein, the hypothesis of independence between average costs and capital structure appears untenable.à ¢Ã¢â€š ¬? Subsequently many studies were conducted with focus on the determination of capital structure and many theories were presented. 3.3 Profitability and Leverage theories Since MM propositions presented, many studies were conducted by releasing MM assumptions focusing on the extent to which each of the assumptions contributes to the determination of the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure. All these theories explains the relationship between leverage and the value of the firm and hence profitability of the firm. There are various theories in order to further explain this relationship. Nevertheless, these theories are actually based on asymmetric information (Myers, 1984), tax deductibility (Modigliani and Miller, 1963; Miller 1977), Bankruptcy costs (Stiglitz, 1972; Titman, 1984) and agency costs (Jensen and Meckling, 1976; Myers, 1977). Two main theories are the pecking order theory and the trade off theory. Pecking Order Theory The Pecking Order Theory is based on information asymmetry between management and investors. So, the stock price of a firm may not reflect correct value of the firm. Myers and Majluf (1984) and Myers (1984) suggest that management issue the security which is overvalued and therefore, undervalued firms tend to avoid issuing equity. They argue that in imperfect capital markets, leverage increases with the extent of information asymmetry. They provided theoretical support to Donaldsonà ¢Ã¢â€š ¬Ã¢â€ž ¢s (1961) findings that firms prefer to use internally generated funds as a financing source and resort to externals funds only if the need for funds was unavoidable. According to (Myers 1995), the dividend policy is à ¢Ã¢â€š ¬Ã…“stickyà ¢Ã¢â€š ¬? and the firms prefer internal to external financing. Firms prefer using internal sources of financing first, then debt and finally external equity obtained by stock issues. Therefore, asymmetric information models seldom point towards a well-defined target debt ratio or optimal capital structure. All things being equal, the more profitable the firms are, the more internal financing they will have, and therefore we should expect a negative relationship between leverage and profitability. The various studies such as Ross (1977), and Myers and Majluf (1984), Harris and Raviv, 1991; Rajan and Zingales, 1995; Booth et al., 2001have supported this relationship that is one of the most systematic findings in the empirical literature. Agency Costs Theory The Agency Costs Theory (Organizational Theory of Capital Structure) emphasize that capital structure was influenced by conflicts between shareholders and managers, and between debt holders and equity holders. Major study into this area was done by Jensen and Meckling (1976) that showed managersà ¢Ã¢â€š ¬Ã¢â€ž ¢ natural tendency to extract too many perquisites and stresses on self-interested behaviour. Obviously, agency costs would increase as the managersà ¢Ã¢â€š ¬Ã¢â€ž ¢ personal ownership stake in the firm decreases. This supplied an argument for debt financing and against à ¢Ã¢â€š ¬Ã‹Å"publicà ¢Ã¢â€š ¬Ã¢â€ž ¢ equity which was contributed by non management investors who cannot monitor management effectively. Fama and Miller (1972), using agency cost theory, proved that leverage was positively associated with firm value. Firms with longer credit histories would have lower cost of debt. The Trade of theory The trade-off theory is based on the considerations of benefits and the costs of debt. This theory argues that firms optimise their capital structure by trading the tax deductibility of interests, bankruptcy costs, and agency costs. This theory is consistent with traditional approach of capital structure. This theory leads to an opposite conclusion. Accordingly if the firms are profitable, they should prefer debt to benefit from the tax shield. Further as the past profitability is a good proxy for future profitability, profitable firms can borrow more because the likelihood of paying back the loans is greater. However after a certain level of leverage, the profitability and the value of the firm will reduce due to interaction of bankruptcy costs and agency costs. 3.4 Various Studies on Capital Structure As the issue of capital structure gained prominence and interest, a number of studies had been done over the years to explore the relationship between capital structure and a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s various characteristics e.g. growth opportunities, non-debt tax shields, firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s volatility, asset systematic risk, asset unique risk, internal funds availability, asset structure, profitability, industry classification, and firm size. This study is concerned particularly on the relationship between capital structure and profitability. Most of the studies had concluded that capital structure measured by debt/equity ratio had an inverse relationship with profitability measured by Return on Investment (ROI). Professor Myers of MIT had written in 1995 that à ¢Ã¢â€š ¬Ã…“the strong negative correlation between profitability and financial leverageà ¢Ã¢â€š ¬? is one of the à ¢Ã¢â€š ¬Ã‹Å"most striking facts about corporate financingà ¢Ã¢â€š ¬? (p.303). It is worthy to mention here that the aforesaid studies were the most comprehensive ever carried out in the US. One significant research was conducted by Bradley, Jarrell and Rim (1984) using Ordinary Least Squares method to analyze the capital structure of 851 industrial firms over a period of 20 years (1962-81). They concluded that an optimal capital structure actually existed as proposed by finance theorists. Bradley, Jarrell and Kimà ¢Ã¢â€š ¬Ã¢â€ž ¢s findings were supported by El-Khouri in 1989 who studied a sample of 1,040 Companies in US from 27 different industries covering a period of 19 years (1968-86). El-Khourià ¢Ã¢â€š ¬Ã¢â€ž ¢s major findings were that there exists an optimal capital structure, and profitability was significantly but negatively related to capital structure. 3.5 Rajan and Zingalesà ¢Ã¢â€š ¬Ã¢â€ž ¢ Study Rajan and Zingales (1995), in their study of determinant of capital structure find that profitability is negatively or inversely related to gearing consistent with Toy et al. (1974), Kester (1986) and Titman and Wessles (1988). Given, however, that the analysis is effectively performed as an estimation of a reduced form, such a result masks the underlying demand and supply interaction which is likely to be taking place. More profitable firm will obviously need less borrowings, although on the supply-side such profitable firms would have better access to debt, and hence the demand for debt may be negatively related to profits. Most of such studies were conducted in US using local companies and hence represents financing and profitability relationship in US economy and might not be applicable in other countries around the globe. Some of the studies conducted in UK as well though changing business and economic environment and time period may have their impact on such capital structure and profitability relationship. Further as discussed earlier much attention was not given to one major aspect of the capital structure, which is the impact on the profitability and hence the value of the firm. So understanding the effect of capital structure on the profitability and hence the value of the firm in the current economic and business environment is the main motivation for this study. CHAPTER 3 RESERCH FRAMEWORK I intend to use two major sets of variables (Ratios) i.e. Debt and Profitability to ascertain the relationship between the capital structure and profitability. The first set includes Gearing ratios Debt/Equity Ratio and Debt Ratio. The other set includes profitability ratios Return on Equity, and Return on Assets. The variables will be analyzed using the descriptive/time-series Correlation and regression technique. 2.1 Data Sample The data used for the empirical analysis will be derived from Hemscott database contains balance sheet, profit and loss and certain Key Ratio information for FTSE 100 companies in UK. For the purposes of this dissertation, I expect to utilise this data to obtain the required variables for all non-financial companies. 2.2 The Model and Research Methodology The following model outlines the framework for research. It consist two major components i.e. the profitability of a firm as the dependent variables and the capital structure of a firm as the independent variables. The arrow pointing to the right indicated the expected direction of causality. However profitability and capital structure relationship is a two way relationship. DEBT RATIO ROE DEBT/EQUITYRATIO ROA The model gave the foundation for analysis which was to explain the relationship among the two main groups of variables. In as much as possible, variables will be selected on the basis of the literature being reviewed. Thus, while this study is expected to give exciting results, there will be direct ties to earlier studies although may reflect the changing requirements of the time. One prominent issue here is the direction of the causality in the model. This research is based on the notion that the capital structure being practised by a firm would affect its profitability. This particular cause-and-effect relationship had been proved in various studies as found in the literature being reviewed. Though it should be kept in mind that there were a number of researchers who had argued that it was profitability which would influence the capital structure (Chudson 1945, Lamothe 1982, Bowen, Daley and Huber 1982). However, it is not within the scope of this study to determine the direction of causality in this particular relationship but rather to focus on the significance of such a relationship. 2.3 Variables In the first instance, great care was taken to define the dependent and independent variables to be used in the descriptive, co variance and regression analysis. As there are several alternative measures of profitability and gearing, only relevant measures are chosen for this cross-sectional analysis. Dependent Variable Profitability is dependent variable in this analysis and two measures of profitability employed in this analysis are Return on Equity (ROE) and Return on Assets (ROA). ROE is the return on equity and is measured as earnings before tax (EBT) divided by ownersà ¢Ã¢â€š ¬Ã¢â€ž ¢ capital or equity. ROE = EBT/EQUITY ROA is return on assets and is measured as earnings before interest and tax divided by total assets (Titman and Wessels, 1998; Fama and French, 2002 and Flannery and Rangan, 2006). The ratio of earnings before interest and tax (EBIT), to the book value of total assets (TA) ROA = EBITDA/TA Independent Variables Gearing Ratio represents capital structure. Therefore, in order to examine the sensitivity or otherwise of their cross-sectional results to the profitability following two ratios are used in this analysis and defined as: Debt to Total Assets: This is a simple ratio of total debt to total assets DEBT RATIO= TD/ TA Debt to Equity Capital: This is the ratio of total debt to capital, with the capital calculated as total debt plus equity, including preference shares. DEBT/EQUITY RATIO = TD / (TD + ECR + PS) PS the book value of preference shares. Research Plan and Implementation Schedule Research work starts from week beginning from October 4, 2010 and is expected to complete in 10 weeks time. The work is scheduled as follows. Research Plan Week Star Date : 04-10-2010 Week 1 2 3 4 5 6 7 8 9 10 Background reading and literature review X X Research design and plan X Choice of methodology X Gathering data X X X Data analysis and refine X X X Writing up draft X X X Editing final document X X Produce final document X Document passed to supervisor to read X Resources I intend to use following resources Hemscott database for data collection. MS Excel for analysing data. University of Wales online library, internet, and some books on finance.

Impact of Right to Work in India

Economic Environment Management PROJECT Impact of the â€Å"Right to work programme† in India SUBMITTED BY – Yash Jhaveri IIM Kozhikode Batch: EPGP04: Date of Submission: 27th January 2013 Contents INTRODUCTION : Right to Work In INDIA †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ 3 What is NREGA / MGNREGA †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. WHAT ARE THE GENERAL BENEFITS RTW / MGNREGA †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ 4 HOW IS THE PROGRAM FINANCED? †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. 4 Financing pattern †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. 4 Release of funds †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ Comparison : RTW/MGNREGA Vs other government based employment schemes †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ 5 Impact of RIGHT TO WORK / MGNREGA †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. 5 Increase in GDP †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. 5 Effect on Inflation †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ Recommendations †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã ¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. 7 REFERENCES †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ 8 2 INDIAN INSTITUTE OF MANAGEMENT – KOZHIKODE INTRODUCTION : Right to Work In INDIA Every human being have rights to fundamental aspects like right to food, life and education. India is a country where approximately thirty percent of the population is below the poverty line.In order to provide millions of humans with rights to life, right to education and right to food that only have access to economic assets like labor power, providing them employment is very important. Unemployment i s one of the major concern and reason for spreading poverty in India. The right to work according to Article 39 of the Indian Constitution urges the State to ensure that â€Å"the citizens, men and women equally, have the right to an adequate means to livelihood†, and that â€Å"there is equal pay for equal work for both men and women.RIGHT TO WORK Program is implemented in India under Mahatma Gandhi national rural employment guarantee act – MGNREGA. The Mahatma Gandhi National Rural Employment Guarantee Act, 2005 (MGNREGA) was notified in 2005, 7TH Septmeber. What is NREGA / MGNREGA Mahatma Gandhi National Rural Employment Guarantee Act was earlier knows as NRGEA. Main aim of this program is to enhance the livelihood andsecurity of people residing in rural areas. This act guarantees a minimum 100 days of wage-employment in a financial year to a rural household whose adult members volunteer to do unskilled manual work.Important original provisions of the MGNREGA are a s outlined below: i. Every household in the rural India shall have a right to a minimum of 100 days of guaranteed employment every year for minimum one adult (above 18 years of age) member, for doing UNSKILLED manual labour, compensation for which is fixed at Rs 120 (one hUndred twenty only) on daily basis. ii. Only productive work shall be undertaken under this program. A list of permissible and preferred works has to be prepared by a state council who shall implement the program.Such preferred works are identified basis the benefits of socio-economical work, the contribution made by such socio-economical work to social equity, and the ability of such work to create assets on permanent basis iii. For successful implementation and for labourers benefit the up-gradation of kills are required of unskilled workers. The program may provide such training and expenses towards these trainings iv. Taking into the consideration the guide lines of states council, Wages to such labourers to be paid in cash or in kind or both. v.To make it easy for the applicant, the program states that employment shall be provided within a radius of 5 kilometres of the village where the applicant resides at the time of applying. In cases where employment is provided beyond such limit of 5 kilometres , transport allowances and daily living allowances shall be paid in accordance with Programme Rules; vi. Given the scenario where at least twenty women are employed at a site, a provision shall be made for one of them to be deputed to look after all / any children under the age of six who may be brought to the worksite if they accompany their parents.The person deputed for such task of minding the children shall be paid the statutory minimum wage; vii. A small portion of the wages not exceeding 5% may be deducted as a contribution to welfare schemes organized for the benefit of labourers employed under the Programme. These welfare schemes are insurance: health and accident, survivor benefits, maternity benefits and social security schemes. 3 INDIAN INSTITUTE OF MANAGEMENT – KOZHIKODE WHAT ARE THE GENERAL BENEFITS RTW / MGNREGA: i. ii. The program provides social protection by providing employment opportunities to the people living in rural India.The program promises livelihood security for the underprivileged and poor through creation of durable assets, improved water conditions and security, soil conversion and as a result of soil conversion higher land productivity The program provides services like drought-proofing and flood management in rural India Through the processes of a rights-based legislation, this program empowers the socially disadvantaged, specifically women, Scheduled Castes and Schedules Tribes The program ensures strengthening decentralized and participatory planning through convergence of various initiatives like anti-poverty and livelihood The program works on grass root levels by deepening democracy by strengthening Panchayati Raj Institution s MGNREGA is a powerful tool which implements transparency and accountability in governance thereby ensuring inclusive growth in rural India.This is because of its impact on social protection, security of livelihood and democratic empowerment. iii. iv. v. vi. vii. HOW IS THE PROGRAM FINANCED? Financing pattern The center will bear the appended costs. 1. For unskilled manual workers: 100% cost of wages 2. For semi skilled and skilled workers :75% cost of wages and material 3. All administrative expense as determined and as per guidelines of central government which essentially includes salary and allowances of program officers and their support staff and work site facilities 4. Administrative expenses of CEGC The state will bear the appended costs 1. For semi skilled and skilled workers:25% cost of wages and material 2.If in case the state government cannot provide wage employment within 15 days of application, the state government to pay unemployment allowance to the applicant. 3. A dministrative expenses of SEGC Release of funds: 1. Unlike in other state run programs where the funds are pre allocated, in this programme , the release of funds is wholly dependent upon the proposals given by the state 2. The ministry of rural development will decide on the sanction of funds once it receives state’s formulated annual work plan and budget proposal. (AWBP) 3. The annual work plan and budget proposal is based on the demands of funds received from the state’s districts and panchayats of districts 4.AWBP also reports the use the of previous funds received by the state and also on key performance indicators determine under the scheme enabling an assessment of proposals received by state government. The said assessment is of qualitative nature. This enables the ministry to decide on the finalizing the amount for the state for the given financial year. The actual disbursement of funds to the state also depends upon the utilization of funds previously allocat ed for the same state. 4 INDIAN INSTITUTE OF MANAGEMENT – KOZHIKODE 5. The district programme coordinator or the state applies to the ministry of rural development , once the 60% of funds released earlier are utilized, for next round of funding under CEGF 6. On receipt to disbursement of funds by the center, the state government will release the funds to the program within 15 days.Comparison : RTW/MGNREGA Vs other government based employment schemes There are a few valid reasons why a right to work- guarantee of employment works better as compared to fly by night program introduced by center and state: †¢ guarantee of employment increases the purchasing capacity of those who are demanding work †¢ This program ensures the inclusion of the poorest of the poor in employment schemes. †¢ The Program brings a sense of security in the laborers lives. Employment guarantee programme boosts the confidence of laborers with respect to high local employment prospect and hen ce discourage season based migration, most laborers resort to in difficult times. Right to work is A legally binding employment guarantee program is far more durable and reliable than fly by night schemes and programs run by state government which have proven on more than one occasions to be extremely short-lived. Impact of RIGHT TO WORK / MGNREGA Increase in GDP Planned expenditure of government is increasing as government is spending (budgeted 33,000 crore for 2012-13) on welfare or construction projects to give work to the unemployed people. A substantial part of this spending goes as the wages to the direct labour. As marginal propensity to consume (MPC) of this labourers is very close to 1, the effect of this government expenditure to the increase of GDP will be very high , which in turn leads to high growth in GDP. As per Keynesian model , increase in the government expenditure will make the GDP grow which in turn amounts for higher output.MGNREGA as Accelerator High proportio n of agricultural population actually owns land. After spending on normal consumption for livelihood, the amount saved is mostly spent on their own farms. So the production from their land also increases leading to further increase in GDP. Change in Interest Rates As we have already discussed, because of the MGNREGA, GDP is supposed to increase, interest rate is higher than earlier. Because of the increase in government spending, consumption also increases, i. e. , demand in the goods market increases leading to a rightward shift of the demand curve. With an increase in output, interest rate also increases.As interest rate increase, investors will be less willing to borrow money from banks. As a result, capital Investment will come down. Decreasing investment will have a negative effect on GDP which will eventually come down. So the net effect on GDP by government sPending for MGNREGA employment will be little less. 5 INDIAN INSTITUTE OF MANAGEMENT – KOZHIKODE Effect on Infla tion Because of the MGNREGA, (i) unemployment is reducing and (ii) people who had a no / nominal income previously are now having nominal /higher income. The overall effect would be reduction of unemployment in the economy. MGNREGA leads to inflation but only in the short run.The higher wage rates in MGNREGA increases the wages of the workers who are working under MGNREGA thereby increasing their marginal propensity to consume. This leads to increase in the demand of food items. In the short run this leads to increase in the prices of the commodities mainly the food items and thus leading to increase in inflation. Also the workers employed under MGNREGA are unavailable for agricultural work during the harvest season, this leads to shortage of farm workers. As a result labourers need to be hired by offering higher wages than that offered under NREGA. As the cost of labour is increased, the effect of this can be observed in the form of increase in the prices of the farm output and thu s shifting the Aggregate supply AS curve to the left.The above mentioned phenomenon can be observed only in the short run because in the long run the infrastructure activities carried out under MGNREGA like construction of wells and dams for irrigation purpose, leveling of roads and water conservation and harvesting will increase the farm output produced thereby leading to increase in the supply of food items thus shifting the AS curve back to the right and thus reducing inflation. Implications Since its inception, the Act has generated 1112. 03 crore person-days. Almost 70% of the MG NREGA labour. The average wage earned has risen from ? 65 per person day in 2006 to ? 100 in 2011. Inclusive Growth – The share of SC/ST families in the work provided under MGNREGA over the previous five years has ranged between 51-61%. Women workforce participation under the Scheme has surpassed the statutory minimum requirement of 33 per cent. Over the previous five years it has ranged between 40-48%. In 2011, there were allegations that the programme was no more effective than other poverty alleviation plans in India.Rumors and reports had a buzz of corruption, controversy and scam written all over MGNREGA. Corrupt officials puncturing the budgets that are allocated, government expenditure routed from the funds for deficit financing, poor quality of infrastructure built under this program, were some of the issues that were being pointed at and questioned. 6 INDIAN INSTITUTE OF MANAGEMENT – KOZHIKODE Recommendations The MGNREGA scheme has been designed as a supply-based model, where the number of works undertaken is dependent on the amount of labourers that register with the scheme. This caters to the primary objective of generating wage employment in India.Although to ensure quality-driven growth, the model has to incorporate a demand-based side, where the labourers are given work according to the value-addition required. The clause about providing an employment within five kilometers of the residence of a labourer needs tweaking. 7 INDIAN INSTITUTE OF MANAGEMENT – KOZHIKODE REFERENCES * NREGA Report to the people – 2nd Feb ‘12 (http://nrega. nic. in/circular/Report%20to%20the%20people_english%20web. pdf) * NREGA Website (http://nrega. nic. in/netnrega/home. aspx) * ‘The Macroeconomics of NREGA’ – Live Mint article (http://www. livemint. com/Opinion/nKoASa6hFXSX3w8Wd0EeWI/Views–The-macroeconomicsof-Nrega. html) * Macroeconomics – N. Gregory Mankiw * ‘The Modern Minimum-Wage Controversy and Its Antecedents’ – A paper by Thomas C. Leonard

The Policy, Illegal Immigration Reform And Immigrant...

Policy Description The policy, Illegal Immigration Reform and Immigrant Responsibility Act of 1996, Division C of Pub.L. 104–208, 110 Stat. 3009-546, shortened to IIRAIRA or IIRIRA, was enacted September 30, 1996 (Illegal Immigration Reform and Immigrant Responsibility Act of 1996). The IIRAIRA is a federal law designed to reduce illegal immigration and to apprehend undocumented aliens (Illegal Immigration Reform and Immigrant Responsibility Act of 1996). It vastly changed the immigration laws within the U.S. Immigration and Nationalization Act, the current policy up to that point (Department of Homeland Security, 2013). Reworking many policy attributes, the changes of largest potential impact were the penalties applied for unlawful presence. Stating that all immigrants must enter the U. S. lawfully by remaining outside the U. S. for 180 days before apply for admission requires undocumented illegally standing immigrants to leave, await their term, then apply for lawful admission (Illegal Immigra tion Reform and Immigrant Responsibility Act of 1996). This new policy requires immigrants documented as unlawfully present for more than 180 days but less than 1 year to be removed, then wait three years before applying for admission, unless they obtain a waiver (Illegal Immigration Reform and Immigrant Responsibility Act of 1996). Immigrants documented as unlawfully present for more than 1 year must be removed, then wait for ten years before applying for admission, unless theyShow MoreRelatedImmigration Reform And Control Act Of 1986 Essay1452 Words   |  6 PagesMay Immigration Reform and Control Act of 1986; 100Stat. 3359 Biblical guidelines. All persons are welcomed into the Kingdom of Heaven. 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The History of Candy Canes

Almost everyone alive grew up familiar with the hard red-and-white candy with the curved end known as a candy cane, but few people realize just how long this popular treat has been in existence. Believe it or not, the origin of the candy cane actually goes back hundreds of years to a time when candy-makers, both professional and amateur, were making hard sugar sticks as a favorite confection. It was around the beginning of the 17th century that Christians in Europe began to adopt the use of Christmas trees as part of their Christmas celebrations. The  trees were often decorated using foods such as cookies and sometimes sugar-stick candies. The original Christmas tree candy was a straight stick and completely white in color. Cane Shape The first historical reference to the familiar cane shape though goes back to 1670. The choirmaster at the Cologne Cathedral in Germany first bent the sugar-sticks into the shape of canes to represent a shepherds staff. The all-white candy canes were then given out to children during the long-winded nativity services. The clergymens custom of handing out candy canes during Christmas services would eventually spread throughout Europe and later to America. At the time, the canes were still white, but sometimes the candy-makers would add sugar-roses to further decorate the canes. In, 1847, the first historical reference to the candy cane in America appeared when a German immigrant named August Imgard decorated the Christmas tree in his Wooster, Ohio home with candy canes. Stripes About 50 years later, the first red-and-white-striped candy canes appeared. No one knows who exactly invented the stripes, but  based on historical Christmas cards, we know that no striped candy canes appeared prior to the year 1900. Illustrations of striped candy canes didnt even show up until the beginning of the 20th century. Around that time, candy-makers began adding peppermint and wintergreen flavors to their candy canes and those flavors would soon become accepted as the traditional favorites. In 1919, a candymaker named Bob McCormack began making candy canes.  And by the middle of the century, his company, Bobs Candies, became widely famous for their candy canes. Initially, the  canes  had to bent by hand to make the J shape. That changed with the help of his brother-in-law, Gregory Keller, who invented  a machine  to automate candy cane production. Legends and Myths There are many  other legends and religious beliefs surrounding the humble candy cane. Many of them depict the candy cane as a secret symbol for Christianity during a time when Christians were living under more oppressive circumstances. It has been claimed that the cane was shaped like a J for Jesus and that the red-and-white stripes represented Christs blood and purity. The three red stripes were also said to symbolize the Holy Trinity and the hardness of the candy represented the Churchs foundation on solid rock. As for the candy canes peppermint flavor, it represented the use of hyssop, an herb referred to in the Old Testament. However, no historical evidence exists to support these claims, although some will find them pleasant to contemplate. As noted earlier, candy canes werent even around until the 17th century, which makes some of these claims improbable.