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A. ■ Cr r>tAA<JTi|JlVA ff K, WtT' V>Ct - C CkUlL< w Vl"' __-* International Finance and Accounting Edited j Bhabatosh Banerjee Jita Bhattacharyya Arun Kumar Basu Special Assistance Programme Third Phase (U,G.C\) Department of Commerce UNIVERSITY OF CALCUTTA CENTRAL LIBRARY © 2006 u DSA in Commerce, University of Calcutta Published : August* 2006 Price i Rs. 295/- only Primed in India by Prof. Bhab«Uosh [ianeijê. Ohordinaioi, DSA in Commerce, University of Calcutta, at Ajanta Printers, 7B Sitaram Ghosh Sti cct* Kolkata-700 009 1 Phone : 2241 -3969) and published by him on hohall of ihc University of Calcutta. m CENTRAL LIBRARY Preface The present research volume is a compilation of paper* tin two closely rclalcd and eoniemporary issues. International Finance and Inlernalional Accounting, that comprise the thrust area prescribed for the purpose of research under the J bird Phase of the Special Assistance Programme in Commerce granted by the University Grants Commission, New Delhi, I he volume contains thirteen re search-based papers (hat were presented in the National Seminar of the DSA Programme in Commerce f3fd phase) held during March 25-26. 2006. The papers iri the volume are almost evenly distributed between the twin research themes that focus keenly on various aspects of the broadly defined thrust area* International Finance and Accounting, Papers on International Finance deal with a number of contemporary and challenging global issues like Price and Volume Effects on Sensex, Pricing of New Economy Stocks, Credit Card Business, Imperatives of FDI* Treasury Management in a Globalized and Digitized Economy and Long Term Investment Decisions. The contributors of papers on International Accounting have hit upon the equally important global phenomena like Holistic Approach to Intellectual Capital, Global Compatibility of Indian GAAP, Revision of AS 15 for Betlei Compatibility, Valuation oT Intellectual Capital. Transfer Pricing and e-Commerce, Tax Implications of International Transfer Pricing and Double Taxation Avoid ance Agreement. All the papers were presented first in the seminar referred to above, which was inaugurated by Prof. Asis Kumar Banerjee, Vice Chancellor. University of Calcutta, Many distinguished academics including Prof. Ranajit Chakra bony, Dean. Faculty of Commerce. .Social Welfare and Business Management, University of Calcutta, Prof. P. Chaitopadhyay, formerly of the University of BurJwan. Prof, D. N Rao, Jawahaiflal Nehru University, Prof. R. D. Slim mu and Dr. Hardeep Chnhal, University of Jammu, Prof. Shi i in Rathorc and Dr AmitahEi Gupta. University of Delhi, Prof., D Pravakara Rao, University of Andhra and Prof, Ashis K. Bhallacharyya and Prof, Ashok Bancrjce of the Indian Institute of Management Calcutta, attended the seminai. There is no doubt I lint the deliberations in the seminar helped the authors significantly to revise I heir papers before submission for blind review by experts on specific areas. As per the suggestions of experts, these papers tm CENTRAL LIBRARY again went through several rounds of revision for enrichment in terms of both content and quality. The instant volume will he a valuable addition to the existing literature on the subject. We express our gratitude 10 ihe authorities of the University Grants Commission. New Delhi. for binding the publication of the present volume. We arc deeply indebted to the Vice-Chancellor, Professor Asis Kumar Bnnerjee. for his encouragement and support. He has favoured us with a Foreword to this volume. Thanks arc also due to the authors Tor their contributions and to other colleagues in the Department for their constant encouragement and support- We arc also grateful to other memhers of the Editorial Board for review of the papers. August H, 2006 Hh^batosh Uanerjec Jita Bhattucharyya Arun Kumar Basu {'tli tors <iv ) CENTRAL LIBRARY Professor Asi.s Kumar Ranerjee uln, Gblloge Street VICE-CHANCEÔR ScFUEE WlIiJu1 MPqt^TOOOn University of Calcutta TcJepliiirif H.I> 224L f TNT7I / 44*4 Fan 1M-JMI4I JJ?*A S-, E-W"l hTÂTlII..' j. hi August S. 2006 Foreword II gives me great pleasure to write this Foreword to International Finance and Accounting\ a research volume that relates to one of the thrust ureas of the Special Assistance Programme (Third Phase) of the University Grants Commission in the Department of Commerce. University of Calcutta. In ihe present globalized environment there is no doubt that interna tional finance and accounting is area of great interest for the concerned academics, professionals and researchers. F:mancc and accounting are complementary to each other in many respects. The volume contains many research papers that were first presented at the DJiA National Seminar held on March 25 and 26. 2006. These papers were then reviewed, revised and edited in the Department, I helieve [he authors have dealt with many intricate areas and issues concern in it international accounting and finance. The efforts are praiseworthy. I wish the present volume will succeed in promoting further interactions and research in this vitally important field of research. - U.. G*,*h. t- ( Prof. Asis Kumar Banerjee ) iv) CENTRAL LIBRARY Contents Pricing of New Ecom imy Slocks A Comparison of USA and India — Gttgari Chakraharti. Anjan Chakrabarti <£ Amitava Sarkar 1-20 Price and Volume Effects Associated with Changes in Sense* Antitahh Gupta and l^nvktrsh Kapoor 21-42 —- A Holistic Approach to Conceptualize Intellectual Capital Hardeep Chahal <4 R Dr Shttrma 43-62 — A Study of Credit Card business ill India during 1995-2005 — J, K. DasandT. ft. Saha 63-78 Imperatives of FDt in India' ITie Key I slues ~Swapan Kumar Chakrabarri 79-88 Jrcasury Management - The Emerging Perspectives in a Globalized and Digitized Economy Tantipa Chakrabony 89- 100 — Global Compatibility of Indian GAAP Dipti Kumar Chakravorty 101—112 — Revision of AS 15 on Employee Benefits - A Step towards Belter Compatibility of Corporate Financial Reporting -— Satyajit Dhar IJ 3- J 23 Long Term Investment Decisions : A Commentary on the Changing Profile of the Problems of Appraisal and Valuation ■— The Managerial Perspective Monipadma Datta 124— I 36 — Valuation of Intellectual Capita! - A Case Study Sharmistha Rawrjee and Par amita Cbakravarry 137-158 — Transfer Pricing and e-Commerce : Some Issues — k.C Pcud 159-172 l ax Implications of International Transfer Pricing — 5i t vhimmy Bhattacharyya t 173-188 Double Taxation Avoidance Agreement (D'l AA) with Special Reference to Double Taxation Rebel -—Sfuthtictyciii Rush 189-199 M0 CENTRAL LIBRARY Pricing of New Economy Stocks : A Comparison of USA and India (japan Chakrabartf Anjan Chakrabarti1 Amitava Sarkar* Abstract With the information Lind communication technology revolution, the global economy is transforming from a low productive, manufacture based old' economy to a knowledge based, service oriented and highly productive ‘new1 economy In [his new era, composition in nock market hu changed significantly with the new economy senior adding values to Ihe stock market* This arlicle inquires whelher this is the initiation of a new era of changed stock pnee behaviour at least in the context of the new economy slocks that characterises all the financial markets experiencing revolution irrespective of their level of deveiopment. J< con firms a tpecbl eharaeiuristte of new eeonoiny slacks that holds across noun tries Key words : Financial Bubble; New Economy Stocks. Bombay Slock En change and NASSAU L INTRODUCTION With the advent of e-rexolutiun* the composition of stock market has changed significantly in countries lhat experienced e-re volution. Ihc new economy sector, cun siiuiling of computer software and hardware firms, firms providing software and hardware services, telecommunication! firms, media and entertainment firms, hfts come ED dominate and m .kIl! values in these nations' struck market. There has been a consensus lhal file significant Stuck value increments in those countries are driven hy the growth rate ol the * Lecturer m EcanaiultSr WgES Barasoi Government College f1 Reader, Ihipjfiititrni ul EconomicUniversity ol Calcutta iS Prottssoi oi Economics .mJ Management, West Bengal University of Technology L CENTRAL LIBRARY 2 International Finance and Accounting emerging new economy sector* Kesu hantly, this new situation has produced a new set of question. In this new economy, dues a "new mechanism' now rule so far as stock market is concerned? Is tins really the initiation of a new era of changed stock price behaviour at least in the tontcxl of the new economy slocks that Characterizes all the financial markets ihal experienced e-revolution irrespec tive td their level of development? We. in ihis article, inquire on the specific issue of whether the new economy stocks irrespective of the level of financial development across countries arc showing similar pattern. This will confirm a special characteristic of new economy stocks that holds across countries. The study selects two countries namely India and USA that experienced c-tevolution and having different level* of development of stock markets. While the US financial market is one of most developed markets in the world in tennis of activity and growth, the Indian stock market remains a relatively less developed financial market. Both the two economies are related substantially m terms of business transactions at least in the context of the emerging new economy sector, The study explores the trends in movements of the new economy stocks in the two countries and seeks to delineate common trends, il any, in the new economy stock price movement in the two countries. The presence oT common trend will con film the special character of the new economy stocks irrespective ofThe level of development of the financial markets. I99B-2Q03 is taken as the study period. This wa* the period when new economy stocks were gaining significance in the global economy and were having profound impact on the very nature of the stock market and its workings, lo trace trends in new economy stock price movement, thirty- seven new economy stocks have been selected for each couniry. Stocks have been selected Irom BSE TMT index [for India) and from NASDAQ 100 (for USA] on basis of availability of data for the entire study period. Price data (on monthly and yearly hasis) and financial data (on yearly basis) have been compiled from official website of Bombay Stock Exchange, New York Slock Exchange and from Official website ol these new economy firms, the structure of the paper is the tallowing. Section I inquires whether ncVi economy scelor has come [f> constitute a significant sector in the slock markets of the two nations. Section 2 explores the factors determining the new economy stock prices in the two Mock markets This is analysed in three ways. First, using a nine scries analysis, second, a cross section analysis and* ihud. a panel data estimation technique. We summarize the results and make ? comparative analysis id the trends in new economy stock price movements m the two economics We conclude m luvoi of a presence or bubble. Section S attempts lo explore the factors leading to die lurrottlion oj such bubble, CENTRAL LIBRARY Chakrabarti, Chakrabam & Sarkar 1, NEW ECONOMY SECTOR IN THE STOCK MARKET To emphasize importance of new economy sector in the slock market ill recent years we could inquire relative importance of different important sectors in influencing activities 01 movement in stock market. To he precise, we investigate whether and lo whai extern market returns arc influenced by sectoral returns. The return of [he sector (hat explains significantly variations in market return might be identified as a significant sector. For India. BSE 200 index is taken as ihc market proxy. The BSE 200 Index (19K9-90= 100} serves ihe purpose of quantifying ihe price movements and reflects the sensitivity of the market in an effective manner BSE Information Technology Sector index {BSE IT), BSE Fast Moving Consumer Goods Sector index (BSE FMCG), BSE Capital Goods Sector fndex (BSE CG), BSE Public Sector Unit Index fBSE PSU) and BSE Healthcare Sector Index (BSE HC) arc the important sectural indices, For USAr Nasdaq 100 is chosen as Ihe market proxy. and NASDAQ Bank Index, NASDAQ Biotechnology Index, NASDAQ Computer Index, NASDAQ Industrial Index, NASDAQ Telecommunications Index and NASDAQ Other Finance Index are chosen to represent different important sectors in US stock market Individual sector returns and market returns arc computed using monthly stock prices as the change in sEock prices. Relative importance of sectors could he Checked by regressing market return on sectoral returns. However, if return series contain unit roots the regression analysis will be subject to the spurious regression phenomenon. Applying Dickey-Fuller (DF) and augmented Die key-Fu Her (ADF) (whenever necessary) tests to Ihe return data using the package Microfit (Version Windows 4.0) reveals all return series (both in India and in USAi to contain unit roots and to be stationary in their first difference (integrated of order one) ihus invalidating estimation using Ordinary Least Square (Table I tind Table 3). This, however, docs not create problem il the series are eomiegrated A cointegrating relationship is seen :is a long term or equilibrium phenomenon. Co integrated variables may deviate from their relationships in The short run. but the in association would return in ihe long run. In this framework, for any sector to be significant m the stock market, individual sectoral returns and market relurn musi be coin leg luted Testing tor eoimediating relationship between market return and individual sector returns has been done using Mtcrofil for Windows (version 4.0) (Table 2 and 4) One sector is chosen at a time and whether the return of the chosen sector is cotintCgraltd with market return is tested Using Johansen estimate ot the oo-integrating vector. Selecting number oJ cointegrating factor lobe I wo and using estimation option fot Irended variable. CENTRAL LIBRARY 4 International Finance and Accounting with an assumed trend m Uw Jala generating process, we find return of the IT sector to he strongly cointegratcd with that of the murkci return in both the countries. This establishes the emerging neu economy sector as an important sector rn both the slock markets along with the other established sectors. Inquiring for the trend in the movements of the new economy stocks in the two markets we find a common trend Year 1998 was the period when new economy stocks were gaining importance. Slock prices experienced a meteoric rise in 1999 anti 2000 followed by a crash. 2001 was a period of downward revision in stock prices that continued in 2002 and 2003, These similarities in price movement invoke further inquiry regarding factors influencing new economy stock prices in the two markets. 3, FACTORS [DETERMINING NEW ECONOMY STOCK PRICES Tlii.s section invesligates the I actors behind formation of new economy stock prices in the two markets. Ideally, in a stock market, fundamentals, that is financial and economic variables determine stock prices. Hence, deviation between actual stock price and true stock price are random, If however, speculative factors determine slock prices, actual prices arc driven away from the true price. This flints formation of 'bubble'. Time series analysis: In literature different time series models arc available. Two such studies are worth mentioning. Dwyer and Hater (1990) suggest prices to be fundamentally determined if dividend payments can explain the changes in stock prices, Blanchard and Watson (1982} explain (he method of detecting the presence of bubble. In any period, actual price deviates from ihc fundamental price by the bubble. With bubble proporltonal change m stock prices will be an increasing function of lime and predictable. This can be tested by regressing proportional change in stock prices on time. One can construct different models to perform (his regression analysis. IBurmsm ( 1999} developed a simple model (A) that could he estimated to detect presence of bubble. In lJ, - a + h.i + c.l2 + c. < } 1 Where E(e,} = 0 for nil i Etc,cM} = 0 and E(e,3) - lor all i, 1 I ) tould he useful lor our purpose. The model incorporates non linearity and il is a multiplicative model where coefficient show proportion- tik’ changes. Since wc have annual financial data, Dwyer and Hafer t!99fJ) meihad would lead to unsatisfactory estimated results due to low degrees of