Volume 8
anagin
Managing
ISSN I581-63II
Global
Boštjan Antončič
International
tr n R^V^fy*
[vJ^cIllvl
journal
Managing Global Transitions
International Research Journal
EDITOR
Boštjan Antoncic, University of Primorska,
Slovenia
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Roberto Biloslavo, University of Primorska,
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Managing Global Transitions
International Research Journal
VOLUME 8 • NUMBER 1 • SPRING 2010 • ISSN I58I-63II
Table of Contents
3 Board Structure and Corporate Performance
ÖzgürArslan
Mehmet Baha Karan
Cihan Eksi
23 The Valuation of Slovene Publicly Traded Companies with
a Valuation Model Based on Expected Earnings
and Growth Opportunities
Igor Stubelj
49 The Impact of Firm Size on Dividend Behaviour: A Study With
Reference to Corporate Firms across Industries in India
Azhagaiah Ramachandran
Veeramuthu Packkirisamy
79 Change Management in Adult Educational Organizations:
A Slovenian Case Study
Romana MartinCiC
97 Understanding iso's 9001 Benefits and Research through
an Operations Strategy Framework
Borut Rusjan
Pavel Castka
Board Structure and Corporate Performance
Özgür Arslan
Mehmet Baha Karan
Cihan Eksi
This paper attempts to analyze the impact of board structure attributes
on their accounting and stock market performance. Our analyses are
built on an emerging market, Turkey for the period between 1995 and
2006. We conduct our analyses through binary logistic methodology.
Our findings show that, while board ownership does not have any im-
pact on the accounting performance, it has a fairly positive influence on
the stock market performance of firms during the crisis period. Simi-
larly, the situation when the ceo of a firm is also the chairman of the
board is not found to have any impact on the corporate performance
of firms, although its negative impact is present during the crisis pe-
riod. Moreover, board independence is found to not to have an effect
on accounting performance, yet the stock market perceives board inde-
pendence positively, both in general and in the crisis periods. Finally,
board size has a positive impact , both on the accounting and on the
stock market performance of firms, yet the impact on the corporate
performance reverts to adverse during the crisis period.
Key Words: board size, board independence, rda, Tobin's Q
jel Classification: G14, G20
Introduction
The main purpose of this study is to examine the impact of board
attributes on corporate performance in an emerging market, Turkey.
Therefore we examine whether a significant difference exists between
board size, board independence, board ownership and their accounting
and stock market valuation performance measures, specifically return
on assets (rda), and Tobin's Q.
This study contributes to the limited existing body of literature re-
garding the emerging markets from various aspects. First, it provides ad-
ditional evidence for determination of the direction of the relationship
Dr Özgür Arslan is an Assistant Professor of Finance in the
Department of Business Administration, Hacettepe University, Turkey.
Dr Mehmet Baha Karan is a Professor of Finance in the Department
of Business Administration, Hacettepe University, Turkey
Cihan Eksi is a Regional Manager in the Halkbank, Turkey.
between board structure and firm performance in an emerging mar-
ket context. Due to the limited number of studies in this field and the
contradictory results obtained, there is still not a consensus on whether
board structure improves firm performance in emerging markets. More-
over, most empirical research studying the relationship between board
structure and corporate performance uses data from the us or other de-
veloped economies and provides mixed results.1 However, the ability to
generalize these results regarding the board structure-performance rela-
tionship may not extend across national boundaries. While the assump-
tion of a utility maximizing agent is universal, each country's regulatory
and economic environment, the strength of capital markets, and cur-
rent governance practices are different. As a result, the importance and
value of various governance structures should be separately examined in
each country. Furthermore, this study presents evidence from an emerg-
ing market and a civil law country which possesses relatively different
characteristics to those of the common law and developed countries that
have been extensively studied by the majority of the existing studies in
the corporate governance literature.
There have only been a few studies addressing Turkey related with this
topic. As compared with the contents of previous studies, this study is
the most detailed one that is directed towards examing the performance
effects of board structure in Turkey. Moreover, having elaborated an
emerging market, one must also take into consideration the fluctuations
in the market. Therefore we also study the role of the board attributes
during the economic constriction periods in Turkey.
We study the period between 1995 and 2006 on a total of 999 firm
level observations and we conduct our analyses through logistic regres-
sions. Despite the finding of Selekler-Goksen and Karatas (2008) that
board structure does not have a significant impact on performance, our
in-depth analyses goes beyond this finding. Firstly, our findings indicate
that while board ownership does not have any impact on the accounting
performance, it has a fairly positive influence on the stock market per-
formance of firms during the crisis period. Similarly, the situation when
the ceo of a firm is also the chairman of the board is not found to have
any influence on corporate performance of firms, however its negative
impact is observed only during the crisis period. Moreover, board inde-
pendence is found not to have an affect on accounting performance, yet
the stock market perceives board independence positively, not only in
general but also during the crisis periods. Finally, our most interesting
results are related to the board size. Generally, board size has a positive
impact on both the accounting and the stock market performance of
firms. Nevertheless, the impact of board size on the corporate perfor-
mance reverts to adverse during the crisis period.
The remainder of the paper proceeds as follows. Section two reviews
the related literature and builds hypotheses. Section three explains briefly
the data and methodology, and section four reports the results of the
analyses of performance measures for the each of the attributes of the
board structure. Finally, section five concludes the paper.
Literature Review and Hypothesis Development
The finance literature covers a vast array of research concerning the rela-
tionship between board structure and firm performance. In other words,
the main two tasks of the board are advising and monitoring the ac-
tivities of management. The better these activities are accomplished the
more improvement in corporate performance will be achieved. There-
fore this section summarizes the literature and builds the hypotheses.
This paper centers on the departure from a basic model of the owner-
manager firm and approach to the separation of ownership from con-
trol. In this paper we concentrate on the concept which leads to the
agency problem (Jensen and Meckling, 1976). The information advan-
tage of controller over owners creates potential for opportunistic behav-
ior. Therefore, we hypothesize that, as the ownership level of board mem-
bers increases, the corporate performance of firms rises in turn, owing to
diminished agency problem. At first, Morck, Shleifer, and Vishny (1988)
find no robust link between the amount of equity owned by members
of the board and firm value. However, through using accounting data,
Bhagat, Carey and Elson (1999) show a significant correlation between
stock owned by outside directors and company performance. Moreover,
Bagnani et al (1994) report a positive relationship between bond returns
and the ownership level, whereas Guest, Gosh, Hughes (2006) find in
uk firms that board ownership has a strong positive impact on long run
share returns and a weak positive impact on operating performance. Fi-
nally Coles, Lemmon and Wang (2008) concludes that ownership does
not have any explanatory power on the firm performance measured by
Tobin's Q.
Chairs are special board members who have the job of overseeing the
entire board's activity. However when a manager of a firm is also chair-
man of the board in the same firm, then the board is not assumed to
be independent in monitoring and advising activities, because the ob-
jectivity in judgment of the performance of the company is likely to be
impaired. When the board is independent it can serve as a balance to tip
the scales in favor of better corporate performance. Rosenstein and Wy-
att (1997) find that independent directors cause stock market investors to
give a positive response and increase the market value of the firm. West-
phal (1999) emphasizes that ceo's intervention on the board, or even
taking up the chairman position, may end up in diminished involvement
and effectiveness of board members by reducing their tendency to con-
trol management decision making. Finally, Millstein and Macavoy (1998)
find a significant correlation between board independence and superior
economic profit.
As for Turkey, Kü^ük^olak and Özer (2007) show that 10.4 percent
of all the ise members have separated the responsibilities of ceo and
chairman. Furthermore, Kula (2005) studies mostly small and non-listed
companies in Turkey and finds that separation of chairman and gen-
eral manager positions has a significant positive effect on firm perfor-
mance. Nevertheless, through studying both accounting and stock mar-
ket data, Bhagat and Black (1999) do not obtain evidence that greater in-
dependence results from higher performance. In accord with this, Nickell
(1995) states that non-executive directors may not have adequate incen-
tives to remove managers when the stock market performance of the firm
declines.
Board size is the most elaborated board structure in the corporate fi-
nance literature, and in general the relationship between board size and
corporate performance is found to be inversely related. Using both To-
bin's Q and roa as the performance measures, Yermack (1996) confirms
a negative association between board size and firm value because benefits
of monitoring from enlarging boards are outweighed by problems asso-
ciated with the increased asymmetric information and deteriorated com-
munication issues. This result is rooted in the finding of Jensen (1993),
which suggests that there is a likelihood that the gap between owner-
ship and control expands as the boards gets bigger. As the size of boards
increases the percentage of independent directors, who have no or very
low ownership in firm, is expected to increase as well.2 A recent study
by Cheng (2008) also concludes that board size has a negative impact on
both the accounting and the stock market performance of the board size.
Finally, Coles, Daniels and Navrees (2008) find that there is a U-shaped
relationship between the firm size and corporate performance.3
Data and Methodology
This study is built on non-financial firms listed on Istanbul Stock Ex-
change (ise). We have a balanced panel including 999 observations. Our
study period is between the years 1995 and 2006. Therefore we are able to
study the role of the crisis period on the board structure-corporate per-
formance relationship as well. We collect financial data directly from the
ise website (www.imkb.gov.tr), whereas the ownership data are gathered
from the Yearbook of Firms, which is issued annually by the ise.
Our aim is also to investigate how the relationship between board
structure and corporate performance is affected during the crisis years.
Therefore we interact every board attribute with a crisis dummy in the
regressions. Turkey was adversely affected by the Russian debt default in
the year 1998 due to the contagion effect. Moreover Turkey was severely
hit by a domestic financial crisis, which reflected its influence during the
years 2001 and 2002. Therefore the crisis dummy takes the value of unity
if the observation years coincide with the years 1998, 2001 and 2002, and
zero otherwise.4
We use logistic regression methodology for conducting our analyses.
Our estimation technique allows for a binary dependent variable, which
rules out the usual regression analysis, including the linear probability
model. The probabilities in our model are bounded by zero and unity,
hence linear functions are inappropriate for our models given that they
are inherently unbounded. In specific, our logit model contains a two
state dependent variable, namely: State 1 = High Corporate Performance
and State 0 = Low Corporate Performance. Put differently, we assume
that the dependent variable is a dummy variable which takes the value of
unity if a firm is reported to have a high corporate performance, and zero
otherwise. A firm is accepted to have a high (low) corporate performance
if the value of its Tobin's Q (roa) is ranked at the top (bottom) 25 percent
of the sample. We exclude all the observations falling between the top
and bottom quartiles of the sample in order to eliminate the shadow
variables. Finally the total number of observations falling into the top
(bottom) quartile is 500 (499).
A common representation of the logit model used in our estimation is
as follows;
Pt = f (X^, Et-!),	(1)
where P\ takes the value of 1, if i is found to have a high Tobin's Q (roa)
in year t and takes the value of zero if otherwise. Vector X't-1 represents
board characteristics of the firm. Vector Et-1 represents other attributes
of the firm such as the financial attributes. More explicitly, the probabil-
ity of having a high corporate performance is a random event and un-
known, but can be estimated. The probability of having a high corporate
performance is:
P[Y' = 1] = po.	(2)
Furthermore, the probability of having a low corporate performance
is:
PY = o] = 1 - po.	(3)
The probabilities are determined by some firm specific variables and
Xi are assumed to come from a logistic distribution function. Then, we
can write the probability of having a high corporate performance as a
function of X as follows:
P[Y' = 1|X] = -(-—.	(4)
1 + exp(l j)
Finally, the probability of having low corporate performance would
be:
exp (ZjXß1)
P[Y' = o|X] =-\j j ' ).	(5)
1 + exp(l j)
We concentrate on the odds ratios while interpreting the regression
results. The coefficients of the model are estimated by the maximum
likelihood method. Furthermore, we include the following control vari-
ables into the model; age , size, debt maturity structure, leverage and cash
holding behavior of the firm.
Results
As seen from table 1, our first results provide the descriptive statistics on
the variables. The average board ownership is found to be only 9.6 per-
cent. Moreover, the average of persons on the board is 5.7. Chairman is
a dummy variable taking the value of 1 if the manager of the firm is also
the chairman of the board, and zero otherwise. Our results show that in
most firms managers do not simultaneously work as a chairman on the
board. Board Independ. represents board independency and is a dummy
table 1 Descriptive statistics
Variables	Mean	Median	Std. Dev.	Minimum	Maximum
Board Own.	9.601	0.120	17.494	0.000	83.320
Board Size	5.708	6	28.810	2	45
Chairman	0.085	0	0.279	0	1
Board Independ.	0.400	0	0.490	0	1
Age	26.692	29	13.087	1	95
Size	17.556	17.575	1.904	0	22.885
Debt Maturity	0.746	0.788	0.183	0	1
Leverage	0.478	0.479	0.211	0	0.984
Cash	0.070	0.029	0.097	0.000	0.850
mv/bv	2.292	1.657	2.116	0.000	14.585
roa	0.057	0.051	0.120	-1.253	0.854
notes This table presents descriptive statistics for the whole sample. Board Own. rep-
resents total ownership percentages of the board members in the firm. Board Size is the
total number of members on the board. Chairman is a dummy variable taking the value
of 1 if the manger of the firm is also the chairman of the board, and zero otherwise. Board
Independ. represents board independence and is a dummy variable taking the value of 1
if the manager is also a board member, and zero otherwise. Age is the number of years
a firm has been operating. Size is the natural logarithm of total assets. Debt Maturity is
the ratio of short term debt to total debt. Leverage is the ratio of total debt to total assets.
Cash is the ratio of cash and marketable securities to total assets. mv/bv is calculated as
[(Book Value of Assets - Book Value of Equity + Market Value of Equity)]/Book Value of
Assets. Finally, Return on Assets (roa) is estimated as net profits scaled by total assets.
variable taking the value of 1 if the manager is also a board member, and
zero otherwise. On average, managers are not found to be a member on
boards, since the average value of the dummy variable is 0.4. Generally,
firms in our sample are found to be young yet large in size. Firms on
average hold short maturity of debt and have a fair leverage yet low cash
holdings. Finally, firms in the sample have on average high growth op-
portunities and a positive return on assets.
Table 2 presents the Pearson Correlation matrix across the variables.
We are assured that we have no threat of multicollinearity since the cor-
relation coeffcient does not exceed 0.50 for any of our variables.
board ownership
We firstly look at the association between ownership levels of board
members and the stock market performance of firms. Table 3 demon-
table 2 Pearson correlation matrix
Variables	Board Own.	Board Size	Chairman	Board Ind.	Age	Size	Debt Mat.	Leverage Cash
Board Own.	i							
Board Size	-0.203*	1						
Chairman	0.209*	-0.137*	1					
Board Ind.	-0.010	0.036	0.098	1				
Age	-0.165*	-0.208*	-0.021	0.062	1			
Size	-0.143*	0.169*	-0.048	0.039	0.151*	1		
Debt Mat.	0.060	-0.053	-0.002	0.081	-0.095	-0.171*	1	
Leverage	-0.007	-0.201*	0.069	0.017	-0.067	-0.043	-0.029	1
Cash	-0.016	0.134*	0.050	0.056	0.020	0.161*	0.037	-0.186* 1
notes This table presents Pearson's Correlation matrix for the main variables used in our analysis. Board Own. represents total ownership
percentages of the board members in the firm. Board Size is the total number of members on the board. Chairman is a dummy variable taking the
value of i if the manger of the firm is also the chairman of the board, and zero otherwise. Board Ind. Represents board independency and is a dummy
variable taking the value of 1 if the manager is also a board member, and zero otherwise. Age is the number of years a firm has been operating. Size
is the natural logarithm of total assets. Debt Mat. is the ratio of short term debt to total debt. Leverage is the ratio of total debt to total assets. Cash
is the ratio of cash and marketable securities to total assets, mv/bv is calculated as [(Book Value of Assets - Book Value of Equity + Market Value of
Equity) ]/Book Value of Assets. Finally, Return on Assets (ro a) is estimated as net profits scaled by total assets. * Indicates that correlation is significant
at the 5% level (two-tailed).
table 3 Board Ownership and the Stock Market Performance
Variables	Coe fficient	Std. Error	Wald	p-value	Odds
Intercept	3.205	0.868	13.653	0.000	
Board Own.	0.006	0.005	1.429	0.232	0.994
Board Own.*Crisis	0.022	0.009	6.481	0.011	0.979
Age	0.022	0.006	15.514	0.000	1.023
Size	-0.355	0.045	62.652	0.000	0.701
Cash	5.139	0.868	35.072	0.000	170.579
Maturity	0.322	0.398	0.655	0.418	1.380
Leverage	4.021	0.366	120.886	0.000	55.783
Goodness of fit tests	Value	p-value			
Cox and Snell - R2	0.204	n/a			
Nagelkerke - R2	0.273	n/a			
-2log likelihood	1156.46	0.000			
No. of observations	999				
notes This table presents the results of the logistic regression, while the independent
variable is mv/bv, which is calculated as [(Book Value of Assets - Book Value of Equity +
Market Value of Equity)]/Book Value of Assets. The independent variable is a binary one
which takes the value of 1 if the mv/bv of that company is situated at the top 25 percent
of the sample and zero if it is situated at the bottom 25 percent of the sample. Board
Own. represnts total ownership percentages of the board members in the firm. Board
Own.*Crisis is an interaction between Board Own. and the crisis years.Crisis is a dummy
variable taking the value of 1if the observation is at the years 1998, 2001 and 2002 and
zero otherwise. Age is the number of years a firm has been operating. Size is the natural
logarithm of total assets. Debt Mat. is the ratio of short term debt to total debt. Leverage
is the ratio of total debt to total assets. Cash is the ratio of cash and marketable securities
to total assets.
strates the regression results, where our dependent variable is the dummy
variable which takes the value of unity (zero) if the value of Tobin's Q of
the firm is situated at the top (bottom) quartile of the sample.
In general, board ownership is not found to have any influence on the
stock market performance of firms. However, we see that board own-
ership has a positive influence during the crisis period. Specifically, a 1
percent increase in the ownership level of board members is likely to
have a 21 percent increase in the stock market performance of that firm.
We conclude that investors opt for the firms having owner members on
boards during the economic constriction periods.
When the control variables in the regression are examined, it is firstly
table 4 Board Ownership and the Accounting Performance
Variables	Coe fficient	Std. Error	Wald	p-value	Odds
Intercept	3.977	0.856	21.607	0.000	
Board Own.	0.007	0.005	2.153	0.142	0.993
Board Own.*Crisis	0.005	0.009	0.304	0.995	0.978
Age	0.005	0.005	0.684	0.408	1.005
Size	-0.216	0.042	26.602	0.000	0.806
Cash	8.004	1.062	56.797	0.000	2993.418
Maturity	1.300	0.424	9.400	0.002	3.668
Leverage	-3.871	0.373	107.923	0.000	0.000
Goodness of fit tests	Value	p-value			
Cox and Snell - R2	0.271	n/a			
Nagelkerke - R2	0.362	n/a			
-2log likelihood	1069.857	0.000			
No. of observations	999				
notes This table presents the results of the logistic regression, while the independent
variable is roa, which is defined as the return on assets and estimated as net profits
scaled by total assets. The independent variable is a binary, one which takes the value of
1 if the roa of that company is situated at the top 25 percent of the sample, and zero if
it is situated at the bottom 25 percent of the sample. Board Own. represents total owner-
ship percentages ofthe board members in the firm. Board Own.*Crisis is an interaction
between Board Own. and the crisis years. Crisis is a dummy variable taking the value of
1 if the observation is at the years 1998, 2001 and 2002, and zero otherwise. Age is the
number of years a firm has been operating. Size is the natural logarithm of total assets.
Debt Mat. is the ratio of short term debt to total debt. Leverage is the ratio of total debt
to total assets. Cash is the ratio of cash and marketable securities to total assets.
seen that, firm age is found to be positively related to Tobin's Q, whereas
firm size is associated with a low stock market performance. As con-
firmed by the finding of Arslan, Florackis, and Ozkan (2006) firms with
high growth opportunities are found here to hoard a high level of cash.
However, despite the highlighted reasoning of a negative association be-
tween long term debt and growth opportunities by Myers (1977), we do
not find any significant relationship between the variables in this regres-
sion.
Our next set of results as presented in table 4 reveals the relationship
between the board ownership and the accounting performance of a firm.
Here dependent variable is the dummy variable which takes the value of
unity (zero) if the value of the roa of the firm is situated at the top
(bottom) quartile of the sample. Interestingly, we find no relationship
between board ownership and the roa of firms. Even the interaction
with the crisis period yields an insignificant relationship. Therefore we
conclude that ownership of board members does not play a significant
role in reducing agency costs and asymmetric information problems in
firms.
Regarding the results on the control variables, firm age is not found to
have a significant impact on the accounting performance of firms. Firm
size has a negative impact on the accounting performance since a one
percent increase in firm size reduces the roa by almost 20 percent. Prof-
itable firms are likely to have a higher level of cash flow, and the posi-
tive and significant coefficient of the cash-holding variable confirms our
reasoning. Profitable firms are found to hold a higher level of short term
debt relative to the long term debt. Finally leverage and profitability are
found to be negatively related. This finding confirms the pecking order
theory of Myers and Majluf (1984) in the sense that profitable firms firstly
resort to their internal funds for financing.
manager as a chairman of the board
Here we investigate the situation when a ceo of a firm also acts as chair-
man of the board. Table 5 provides the results on the relationship of the
separation between the manger and chairman positions in a firm and its
stock market performance.
The separation is not found to have any impact on the stock market
performance of firms. However the interaction with the crisis dummy
shows us that the market perceives the situation when such a separation
is not fulfilled in a firm as being a bad signal during the crisis period.
Therefore, a one percent increase in the occurrence of an event of non-
separation of a managerial and a chairman position in a firm is likely to
decrease its stock market performance by 66 percent. The results on the
relationship between the control variables and the stock market perfor-
mance go hand in hand with those reported in table 3.
When we move to the impact of the degree of separation between the
manager and chairman roles on the accounting performance of firms,
we regard the results reported in table 6.
Interestingly we can not find a statistically significant relationship be-
tween the Chairman dummy and the accounting performance, neither in
general nor specifically in the crisis period. Therefore we conclude that
the non-separation between the ceo and chairman positions in a firm is
table 5 Manager as the Chairman of the Board and the stock market performance
Variables	Coe fficient	Std. Error	Wald	p-value	Odds
Intercept	2.698	0.883	9.323	0.002	
Chairman	0.112	0.286	0.152	0.697	1.118
Chairman*Crisis	-1.070	0.532	4.039	0.044	0.343
Age	0.024	0.006	18.663	0.000	1.025
Size	-0.339	0.044	58.884	0.000	0.713
Cash	5.242	0.872	36.173	0.000	188.965
Maturity	0.307	0.396	0.598	0.439	1.359
Leverage	3.991	0.363	120.711	0.000	54.128
Goodness of fit tests	Value	p-value			
Cox and Snell - R2	0.199	n/a			
Nagelkerke - R2	0.265	n/a			
-2log likelihood	1163.62	0.000			
No. of observations	999				
notes This table presents the results of the logistic regression, while the independent
variable is mv/bv, which is calculated as [(Book Value of Assets - Book Value of Equity +
Market Value of Equity)]/Book Value of Assets. The independent variable is a binary one,
which takes the value of 1 if the mv/bv of that company is situated at the top 25 percent
of the sample, and zero if it is situated at the bottom 25 percent of the sample. Chairman
is a dummy variable taking the value of 1 if manager of the firm is also the chairman
of the board, and zero otherwise. Chairman*Crisis is an interaction between Chairman
and the crisis years. Crisis is a dummy variable taking the value of 1 if the observation is
at the years 1998, 2001 and 2002, and zero otherwise. Age is the number of years a firm
has been operating. Size is the natural logarithm of total assets. Debt Mat. is the ratio of
short term debt to total debt. Leverage is the ratio of total debt to total assets. Cash is the
ratio of cash and marketable securities to total assets.
not found to be as hazardous as expected for the accounting performance
of firms. In other words, managers, who also hold chairman position in
a firm, are not likely to transfer wealth to their benefit at the expense of
the shareholders. The results on the control variables align with those
reported in table 4.
board independence
Table 7 presents the results of the estimation for a possible relationship
between board independence and the stock market performance. Here,
we are only interested in the situation in which a manager is only a mem-
ber of the board, not a chairman. Therefore the results in this section are
different in interpretation to those reported in the previous section.
table 6 Manager as the Chairman of the Board and the accounting performance
Variables	Coe fficient	Std. Error	Wald	p-value	Odds
Intercept	3.871	0.852	20.633	0.000	
Chairman	-0.082	0.305	0.073	0.787	0.921
Chairman*Crisis	-0.329	0.578	0.325	0.569	0.720
Age	0.006	0.005	1.414	0.234	1.006
Size	-0.217	0.042	26.966	0.000	0.805
Cash	7.989	1.064	56.392	0.000	2948.91
Maturity	1.307	0.424	9.492	0.002	3.695
Leverage	-3.865	0.372	107.832	0.000	0.000
Goodness of fit tests	Value	p-value			
Cox and Snell - R2	0.269	n/a			
Nagelkerke - R2	0.359	n/a			
-2log likelihood	1073.015	0.000			
No. of observations	999				
notes This table presents the results of the logistic regression, while the independent
variable is roa, which is defined as the return on assets and estimated as net profits
scaled by total assets. The independent variable is a binary one, which takes the value of
1 if the roa of that company is situated at the top 25 percent of the sample, and zero if it
is situated at the bottom 25 percent of the sample. Chairman is a dummy variable, taking
the value of 1 if manager of the firm is also the chairman of the board and zero other-
wise. Chairman*Crisis is an interaction between Chairman and the crisis years. Crisis is
a dummy variable, taking the value of 1 if the observation is at the years 1998, 2001 and
2002, and zero otherwise. Age is the number of years a firm has been operating. Size is the
natural logarithm of total assets. Debt Mat. is the ratio of short term debt to total debt.
Leverage is the ratio of total debt to total assets. Cash is the ratio of cash and marketable
securities to total assets.
Our results show that board independence is negatively related with
Tobin's Q of a firm. A1 percent increase in the board independence is ex-
pected to decrease the stock market performance by almost 74 percent.
Similarly, board independence is also perceived as a bad signal during
the crisis period. Observing a 1 percent increase in the board indepen-
dence is likely to decrease the stock market performance by almost 63
percent. The results concerning the control variables are in accord with
those previously reported.
Our next results are reported in table 7 and they demonstate the direc-
tion of the association between board independency and the accounting
performance. We find no statistically significant role of board indepen-
table 7 Board Independence and the Stock Market Performance
Variables	Coe fficient	Std. Error	Wald	p-value	Odds
Intercept	2.800	0.882	10.021	0.002	
Board Independ.	-1.334	0.468	8.145	0.004	0.263
Board Independ.*Crisis	-0.976	0.268	13.260	0.000	0.377
Age	0.024	0.006	18.210	0.000	1.025
Size	-0.342	0.045	57.878	0.000	0.710
Cash	5.625	0.873	41.504	0.000	277.298
Maturity	0.268	0.401	0.508	0.476	1.331
Leverage	4.281	0.377	129.151	0.000	72.322
Goodness of fit tests	Value	p-value			
Cox and Snell - R2	0.212	n/a			
Nagelkerke - R2	0.283	n/a			
-2log likelihood	1146.68	0.000			
No. of observations	999				
notes This table presents the results of the logistic regression, while the independent
variable is mv/bv, which is calculated as [(Book Value of Assets - Book Value of Equity +
Market Value of Equity )]/Book Value of Assets. The independent variable is a binary one,
which takes the value of 1 if the mv/bv of that company is situated at the top 25 percent
of the sample, and zero if it is situated at the bottom 25 percent of the sample. Board
Independ. represents board independence and is a dummy variable taking the value of
1 if the manager is also a board member, and zero otherwise. Board Independ.*Crisis is
an interaction between Board Independ. and the crisis years. Crisis is a dummy variable,
taking the value of 1 if the observation is at the years 1998, 2001 and 2002, and zero other-
wise. Age is the number of years a firm has been operating. Size is the natural logarithm
of total assets. Debt Mat. is the ratio of short term debt to total debt. Leverage is the ratio
of total debt to total assets. Cash is the ratio of cash and marketable securities to total
assets.
dence in the accounting performance of firms, not only in general but
also within its interaction with the crisis period. Furthermore, the con-
trol variables are identical in sign and significance with the previous find-
ings.
We conclude that board independence has an adverse impact on cor-
porate performance in general. It is likely that independent board mem-
bers in Turkish firms do not have sufficient incentives to monitor man-
agement, due to the following reasons. First of all, the executive and non-
executive split may be non-artificial for Turkish firms. In other words,
the benefits of board members may be informally parallel to those of the
managers in expense at the shareholders. Furthermore, there may be an
table 8 Board Independence and the Accounting Performance
Variables	Coe fficient	Std. Error	Wald	p-value	Odds
Intercept	3.979	0.860	21.386	0.000	
Chairman	-0.156	0.166	0.887	0.346	0.856
Chairman*Crisis	-0.098	0.272	0.130	0.718	0.907
Age	0.007	0.005	1.509	0.219	1.007
Size	-0.220	0.042	27.518	0.000	0.802
Cash	7.929	1.062	55.754	0.000	2777.879
Maturity	1.314	0.424	9.594	0.002	3.720
Leverage	-3.880	0.374	107.845	0.000	0.000
Goodness of fit tests	Value	p-value			
Cox and Snell - R2	0.270	n/a			
Nagelkerke - R2	0.359	n/a			
-2log likelihood	1072.218	0.000			
No. of observations	999				
notes This table presents the results of the logistic regression, while the independent
variable is roa, which is defined as the return on assets and estimated as net profits
scaled by total assets. The independent variable is a binary one, which takes the value
of 1 if the roa of that company is situated at the top 25 percent of the sample, and
zero if it is situated at the bottom 25 percent of the sample. Board Independ. represents
board independence and is a dummy variable taking the value of 1 if the manager is also
a board member, and zero otherwise. Board Independ.*Crisis is an interaction between
Board Independ and the crisis years. Crisis is a dummy variable taking the value of 1 if the
observation is at the years 1998, 2001 and 2002, and zero otherwise. Age is the number of
years a firm has been operating. Size is the natural logarithm of total assets. Debt Mat. is
the ratio of short term debt to total debt. Leverage is the ratio of total debt to total assets.
Cash is the ratio of cash and marketable securities to total assets.
asymmetry of information between non-executive and executive mem-
bers on a board. Therefore, the quality of financial or strategic informa-
tion divulged to non-executive members by the executive ones may be
poor.
board size
Table 9 presents results on the relationship between board size and firm
performance. In contrast to to the general findings in the literature,
board size is found to have a positive impact on the stock market per-
formance of firms. Specifically, a 1 percent increase in the size of a board
is likely to increase the stock market performance of firms by 1.3 times.
However board size is found to be negatively affecting the stock market
table 9 Board Size and the Stock Market Performance
Variables	Coe fficient	Std. Error	Wald	p-value	Odds
Intercept	2.270	0.889	6.524	0.011	
Board Size	0.295	0.046	40.327	0.000	1.343
Board Size*Crisis	-0.159	0.027	34.646	0.000	0.853
Age	0.017	0.006	8.458	0.004	1.017
Size	-0.413	0.048	73.179	0.000	0.661
Cash	5.622	0.887	40.174	0.000	276.503
Maturity	0.330	0.406	0.674	0.412	1.395
Leverage	4.749	0.397	143.313	0.000	115.493
Goodness of fit tests	Value	p-value			
Cox and Snell - R2	0.246	n/a			
Nagelkerke - R2	0.328	n/a			
-2log likelihood	1102.61	0.000			
No. of observations	999				
notes This table presents the results of the logistic regression, while the independent
variable is mv/bv, which is calculated as [(Book Value of Assets - Book Value of Equity +
Market Value ofEquity)]/Book Value of Assets. The independent variable is a binary one,
which takes the value of 1 if the mv/bv ofthat company is situated at the top 25 percent of
the sample, and zero if it is situated at the bottom 25 percent of the sample. Board Size is
the total number of members on the board. Board Size*Crisis is an interaction between
Board Size and the crisis years. Crisis is a dummy variable, taking the value of 1 if the
observation is at the years 1998, 2001 and 2002, and zero otherwise. Age is the number of
years a firm has been operating. Size is the natural logarithm of total assets. Debt Mat. is
the ratio of short term debt to total debt. Leverage is the ratio of total debt to total assets.
Cash is the ratio of cash and marketable securities to total assets.
performance during the crisis period. A 1 percent increase in the board
independence is likely to decrease the stock market performance by al-
most 15 percent. Control variables have similar sign and significance lev-
els to those of the previous findings.
Results in table 10 show the relationship between board independence
and the accounting performance. Similar to the previous findings, board
size increases the accounting performance of firms. A 1 percent increase
in the size of the board increases the accounting performance by almost
1.08 percent. In a similar fashion, board size has a negative influence on
the roa of firms. A 1 unit increase in the board size decreases the ac-
counting performance of firms by almost 5 units. The significance and
signs of the control variables align with those of the previous findings.
We derive from these results that board size has a generally positive
table 10 Board Size and the Accounting Performance
Variables	Coe fficient	Std. Error	Wald	p-value	Odds
Intercept	3.536	0.881	16.103	0.000	
Board Size	0.080	0.044	3.308	0.069	1.084
Board Size*Crisis	-0.049	0.027	3.302	0.069	0.952
Age	0.003	0.006	0.356	0.551	1.003
Size	-0.220	0.042	27.335	0.000	0.803
Cash	8.033	1.070	56.378	0.000	3081.806
Maturity	1.276	0.425	9.024	0.003	1.558
Leverage	-3.801	0.373	103.736	0.000	0.000
Goodness of fit tests	Value	p-value			
Cox and Snell - R2	0.273	n/a			
Nagelkerke - R2	0.364	n/a			
-2log likelihood	1067.856	0.000			
No. of observations	999				
notes This table presents the results of the logistic regression, while the independent
variable is roa, which is defined as the return on assets and estimated as net profits
scaled by total assets. The independent variable is a binary one, which takes the value of
1 if the roa of that company is situated at the top 25 percent of the sample, and zero if
it is situated at the bottom 25 percent of the sample. Board Size is the total number of
members on the board. Board Size*Crisis is an interaction between Board Size and the
crisis years. Crisis is a dummy variable, taking the value of 1 if the observation is at the
years 1998,2001 and 2002, and zero otherwise. Age is the number of years a firm has been
operating. Size is the natural logarithm of total assets. Debt Mat. is the ratio of short term
debt to total debt. Leverage is the ratio of total debt to total assets. Cash is the ratio of
cash and marketable securities to total assets.
effect on the corporate performance through increasing effectiveness in
advising the decision-making in a firm through the diversified experi-
ence and know-how of the various members. Similarly, the marginal
costs of monitoring the managerial activity are observed to be decreasing
as the board size increases. However the situation reverts during the crisis
period, and board size becomes disadvantageous for the corporate per-
formance of firms. It is likely that communication problems arise during
the economic downturn times, hence the costs of the board size then
outweigh its benefits.
Conclusion
The impact of the attributes of the board structure is not elaborated in
detail in the corporate finance literature from an emerging market per-
Volume 8 ■ Number 1 ■ Spring 2010
spective. Therefore, this study shows the relationship between the cor-
porate performance, namely the accounting and the stock market per-
formance, and the board independence, separation of the tasks of man-
agement and chairman, board ownership and the board size. We build
our analyses on the a total of 999 observations of Turkish non-financial
listed firms for the period between 1995 and 2006. We conduct our anal-
yses through logistic methodology by eliminating the shadow variables.
We also study how the relationship is affected during the crisis periods.
Our findings indicate that, while board ownership does not have any
impact on the accounting performance, it has a fairly positive influence
on the stock market performance of firms during the crisis period. Sim-
ilarly, the situation when the ceo of a firm is also the chairman of the
board is not found to have any impact on the corporate performance of
firms, although its negative impact is observed during the crisis period.
Moreover, board independence is found not to have affect on accounting
performance, yet the stock market perceives board independence pos-
itively both in general and in the crisis periods. Finally, our most in-
teresting results are related to the board size. Generally, board size has
a positive impact on both the accounting and the stock market perfor-
mance of firms. Nevertheless, the impact of board size on the corporate
performance reverts to adverse during the crisis period.
Notes
1	See among others Hermalin and Weisbach 1991; Agrawal and Knoeber
1996; Brickley, Coles, and Terry 1994.
2	In accord with this, Bhagat and Black (1996) find that the median owner-
ship percentage of independent directors is 1 percent.
3	Following this finding we have checked the Turkish data, however our re-
sults do not confirm a noneconomic U-shape relationship between board
size and both roa and Tobin's Q. Therefore, in our analyses, we assume
that the association is linear.
4	We also take the 1997 Asian crises into account, however the contagion
effect of this incidence was midly felt in Turkey. Besides, our results do not
change when we include the years 1997 as a unity dummy in our analyses.
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Valuation of Slovene Publicly Traded Companies
with a Valuation Model Based on Expected
Earnings and Growth Opportunities
Igor Stubelj
The article sheds light on valuating Slovene publicly traded companies.
The research aim is to solve the problems about company valuation
in an emerging market, such as the Slovene market certainly is. The
critical point is how to evaluate the variables to put in the valuation
model. The chosen methodology deals with these problems, and min-
imizes the analyst's subjective judgment and the bias the analyst puts
into the valuation. Twenty Slovene publicly traded companies are val-
uated with a valuation model based on expected earnings and growth
opportunities. The research provides the assessment and the usefulness
of valuation with the model and the conclusions from the valuation
results.
Key Words: company valuation, earnings, investments, capital,
cost of equity capital
jEL Classification: G30, G34
Introduction
Investors and managers very often have to ask themselves how much the
worth is of their business, their company, the competitive company or
maybe the company in which they intend to invest their capital. The
managers' primary objective should be to increase the value of the in-
vestors' equity capital. To do so, they must know the factors that in-
fluence the value of the company and their impact on the share price.
Without this knowledge they will not be able to know the consequences
of their decisions, and the influence on the share price of the company
(Glen 2005). Because of the market imperfection and the investors' per-
ceived expectations there is a difference between the market and the
internal price of a company. From Bertoncel's perspective (2006), the
internal value of the company is based on the profound analyses and
the judgment of the company. The internal value is often expressed as
a present value of expected cash flows from operations, discounted at
Igor Stubelj is a Lecturer at the Faculty of Management Koper,
University of Primorska, Slovenia.
the present value with a proper discount rate. We can call the internal
value the 'right' or 'real' value of the company.
From the perspective of many experts, valuating a company on the ba-
sis of present and past data is nonsense. Moreover, Jerman and Manzin
(2008) argue that financial accounts often do not provide evidence for
all the capabilities for future growth and future earnings, as many in-
tangibles do not meet the criterion for their recognition. Damodaran
(2006) comments that with financial data and appropriate methodol-
ogy it is possible to forecast the value for most assets, albeit with error,
and that the forecast value is not very different from the market value
in the long term. He also comments that the difficulty of valuation is
the bias the experts put into the models. They often have an idea of the
value of the company before putting the numbers in the models. In this
case, the result of the valuation is the product of their expectations. In
the process of valuation we must pay attention to the possible bias in-
troduced by the valuers, the unpredictable future, and the complexity
that modern technology and simple access to information insert into the
analysis.
The paper is organized as follows. After the introduction the aims of
the research are presented, followed by the theoretical background of dy-
namic equity valuation. Further we explain the methodology used , the
market properties and present the data. Last are the results and conclu-
sions. In addition we make suggestions for further research.
Aims of the Research
The valuation models are more or less 'simple' in theory, but the esti-
mation of the variables to be inserted into the models is not simple in
practice. The evaluation of the variables is very important and critical
for the results of the valuation. The value of variables is often a sub-
jective choice of the analysts. We propose the method used, e. g. kernel
estimator, based on historical data to forecast the expected variables. We
also propose the method to evaluate the cost of equity capital for Slovene
companies, which is problematic due to the short history of data and the
characteristics of a new and developing Slovene capital market. We have
tried to reduce the subjectivity with the methodology used in our valua-
tion.
The aim of the research was to evaluate Slovene publicly traded com-
panies' valuation with a model, based on expected earnings and growth
opportunities. We have chosen a 'simple' model which uses financial data
from the balance sheet and income statement. The data used for the val-
uation are public and accessible.
With the help of statistical methods, on the sample of twenty Slovene
publicly traded companies, we have evaluated the usefulness and the pos-
sibility of valuating Slovene publicly traded companies with the model
based on expected earnings and growth opportunities and the chosen
methodology.
The objective was to find the difference between the calculated internal
value and the market value of the company and the variance of the mar-
ket value that the model can explain. However, we have expected a low
explained variance and small usefulness of the model on the developing
and fast changing Slovene equity market.
Dynamic Equity Valuation: Theoretical Background
Company's valuation is a utilitarian activity. Because of the value of
a good valuation, the experts have developed several models based on
different presumptions and determinants of value.
For the investor the value of an investment in financial terms is the
present value of expected cash flows the investment (asset) will gener-
ate in the life time. Different valuation models have different presump-
tions about which are the relevant cash flows to discount at a present
value. In the literature we can find at least four more or less distinct ap-
proaches to the valuation of shares (Miller and Modigliani 1961): (1) the
discounted cash flow approach; (2) the current earnings plus future in-
vestment opportunities approach; (3) the stream of dividends approach;
(4) the stream of earnings approach. Miller and Modigliani (1961) have
demonstrated that these approaches are, in fact, equivalent.
One of the first and simplest valuation tools is the Gordon model
(1962). The Gordon model is based on the presumption that the future
cash flows an investor receives from a stock are cash dividends growing
at a constant growth rate. However, the Gordon model cannot be used
if we do not expect dividends (frequent in start-ups firms) in the near
term or when the growth rate is bigger than the cost of equity (frequent
in fast growing firms) but we expect that competition influence will di-
minish it in the future. The model is not a perfect descriptor of reality;
however, it helps to reduce the range of uncertainty around key value
drivers (Harris, Eades, and Chaplinsky 1998). The model was used by
Fama and French (2002) and Harris and Marston (1992; 2001) to esti-
mate the equities and market risk premiums. Foerster and Sapp (2005)
in their research found out than over the entire sample period (more
than 120 years) dividend-based models perform well at explaining actual
prices; they perform better than commonly used earnings-based models.
The major drawback of the dividend models is that they require estima-
tion of the expected dividends (see Sorensen and Williamson 1985; Rozeff
1990). Estimation became increasingly difficult for companies with vary-
ing growth rates or irregular dividend payouts. In such cases, earnings
based valuation approaches may be more useful (French, Subramaniam,
and Trapani 1998).
The discounted Free Cash Flow Models (fcfm or dcf) are not very
different to the dividend discount models. The fcfm consider potential
dividends an investor can gain from the investment. There are simple
fcfm models in which dividends grow at a stable sustainable growth
rate to infinity, the costs of capital are constant and two or multi-stage
models based on different presumptions of growth in different time in-
tervals. In these latter models also the cost of capital can differ at dif-
ferent stages. Copeland, Koller and Murrin (2000) argue that managers
who use the discounted cash flow approach for valuation focusing on in-
creasing long-term free cash flow will ultimately be rewarded by higher
share prices. They also argue that the evidence from the market is con-
clusive. Naive attention to accounting earnings will often lead to value-
destroying decisions. The greater risk in the use of dcf models is reliance
on subjective analyst input of the many critical variables required (Raw-
ley and Schostag 2006).
A very prominent valuation method is residual income valuation
(riv). It is theoretically equivalent to the discounted 'free-cash-flows-
to-equity' model as well as the original dividend discount model from
which both are derived. The model expresses total common equity value
as the sum of the book value of stock-holders' equity and the present
value of residual income (ri). ri is defined as the difference between
reported net income and the product of book value of equity and the
firm's cost of equity capital (Halsey 2001). The problems with the use of
riv were analyzed by Ohlson (2000). The reason for a widespread accep-
tance of the riv model is the importance the model gives to accounting
data in equity valuation. On the contrary, traditional equity valuation
models, which are based on future cash flows, suggest a general irrele-
vance of future earnings and other accounting data (Ohlson 2005). The
residual income is in principle the same on the level of equity capital
as Economic Value Added or Economic Profit (eva) on the level of total
capital. A variant of the riv model with the fade rate assumption or with
the perpetuity assumption is explained in Bradshaw (2004).
In the last years several research studies have been done with the
purpose of comparing the riv an fcfm based valuations, see Bernard
(1995), Francis et al. (2000), Frankel and Lee (1998). On the balance, the
riv is more accurate in forecasting the share value than the fcf based
valuation (Halsey 2001). Lundholm (1995) and Lundholm and O'Keefe
(2001) proved that with both models we get satisfying results and that
the proven superiority of the ri model and the difference between the
results is due to the use of incorrect presumptions.
Beside all the models discussed above, analysts have developed other
less known variants of equity valuation models based on different pre-
sumptions and determinants of value.
Methodology and Data
THE VALUATION MODEL
In a previous research we have used three models with equal methodol-
ogy for the valuation of companies on the Slovenian equity market (see
Stubelj 2008). We used the models on 20 Slovenian publicly traded firms.
The first was the Residual Income Valuation model (riv), the second
was the expected stream of earnings approach in valuation (Miller and
Modigliani 1961), and the third was the Thomas J. O'Brien model (2003).
With the first model we obtained results for 14 (of 20) companies. In the
case of 6 companies the growth rate of the residual income exceeds the
cost of capital. In this case the result did not make have any sense. With
the second model we got the results for just 9 companies. The problems
with this model arise when the growth rate of net income exceeds the
cost of capital, which was the case of these 11 companies. The results in
such case did not make sense. The problem with the first two models is
that companies in emerging markets and also in transition economies
have a great volatility of data in the financial reports due to the transi-
tion process (see also Kaväc and Tavcar 2008) and also to possible fast
growth. The reason for instable financial data lies not just in companies'
operations but rather in the necessity to adapt to changing conditions
and frequent law changes, which is the case for the Slovene market. With
the O'Brian model we have obtained the results for all 20 companies. We
conclude that the model could be used in emerging markets. However we
have not used all the possible dynamic valuation models in the research,
but O'Brien's results provided the rationale to use the his model in this
research and test the explanation power on an emerging equity market
(see Stubelj 2008). The O'Brien (2003) formula may lend itself to appli-
cation to many real-world cases of supernormal, but declining earnings
growth and with no current dividend payments, and may avoid the need
to resort to complex spreadsheet or real options models. We did not find
any research that has tested this model for the valuation of companies in
emerging equity markets. Therefore we believe the proposed method is
being used for the first time in one of the emerging economies.
The model is based on the Miller and Modigliani (1961) formulation
of an asset's value as the sum of two present values. The first is the present
value of the current operations. The second is the present value of growth
opportunities.
The O'Brien formula emphasizes that the fundamental drivers of a
firm's expected future earnings stream are:
•	the expected investment outlay in the next period,
•	the expected growth rate of future investment outlays,
•	the expected rate of convergence of the new investments' return on
equity (roe) to the firm's cost of equity, if competition is expected
to gradually erode the excess roe.
The formula is simple, because it assumes that the expected growth
rate of future investment outlays and the expected convergence of their
roe's to the firm's cost of equity capital are constant (O'Brien 2003).
The formula may be applicable for some reasonable earnings and free
cash flow patterns not possible with the Gordon model. For example,
by not requiring a firm's new investment to be a constant plowback per-
centage of earnings, the model may be applied to a firm that requires
external funds in excess of earnings in the near term, while forecasted to
pay net dividends in the future. The formula may also be applied to firms
with declining earnings growth patterns and even to firms with negative
near-term earnings (O'Brien 2003).
O'Brian states that the value of the firm may be expressed as:
where: E1 - annual earnings expected from the assets currently in place,
k - firm's cost of equity capital, IL - incremental equity capital investment
v = El = *	,
k k \ k + d j
d = f - gii,
V =
(2)
(1)
outlay expected a year from now, R1 - roe expected on I1, the expected
incremental income level (from investing I1) divided by I1, R1 = AE2/I1,
d - expected annual decay rate in the net present values of the firm's
future growth opportunities, d = f - g1, f - annual fade rate at which
the roe's for new investments are expected to converge toward the firm's
cost of equity capital, and gh - expected annual growth rate of incremen-
tal investment outlays; IN = I1(i + g1)N, N = 2,3,...
The estimation of f and g1, as well as the estimation of the expected
earnings, expected investment outlays, expected growth rates and other
variables present the most difficult part in using the formula. The source
of errors lies in the imprecision of their estimation.
In the research, Fama and French (2000) have proved that in a com-
petitive environment the profitability is mean reverting. This is in line
with standard economic arguments which say that in a competitive en-
vironment competitive forces produce mean reversion in profitability. In
a simple partial adjustment model they have discovered that the rate of
mean reversion is about 38% year. But the mean reversion is highly non-
linear. Mean reversion is faster when profitability is below its mean and
when it is far from its mean in either direction.
In the O'Brien formula it is considered that competition would dimin-
ish the excess roe and plowback opportunities in the future. The erosion
of the growth opportunities is gradual and perpetual. The erosion is de-
fined by the decay rate in the formula.
THE COST OF CAPITAL
The cost of equity capital represents the minimum return investors re-
quest on their invested capital. For this reason we use it as a discount
factor for the future earnings and cash flows from the new investment
opportunities. A small change in the cost of capital is reflected in bigger
change of value. The profitability on the level of the capital cost is not
an added value, it is a cost of the invested capital. It is a profitability that
investors demand for the risk they bear.
The equity capital is not 'working' for free, for its use we must pay
a certain price to its owners. It is a scarce good. In aggregate it is limited
to the amount that people in the whole world are willing to save (invest).
The task of earning a capital cost is not a question of company financ-
ing or - worse defined - subordinated to other company goals, as many
managers think. To earn a cost of capital is the market mandate (Stewart
In the oft-cited publication Stocks, Bonds, Bills, and Inflation, Ibbot-
son and Sinquefeld wrote: 'Estimating the cost of capital is one of the
most important and difficult tasks performed by financial analysts. There
is no clear consensus on the best way to approach this problem. Because
of the impact that the cost of capital can have on valuation and financial
decision making, the analyst should typically use at least two methods to
derive the cost of equity.' (Borgman and Strong 2006.)
Many models and techniques have been developed to estimate the cost
of equity capital, such as: the Capital Asset Pricing Model (capm) (Black
1972; Lintner 1965; Ross 1976; Sharpe 1964), the Fama and French Three
Factor Model (Koller, Goedhart and Wessels 2005; Estrada 2005), the
Arbitrage Pricing Theory and others. Mishra and O'Brien have studied
(2004) the empirical perspective on the issue of a global investor's cost of
capital for an emerging market investment.
The primary conclusion of the capm (3) is that the relevant risk of
an individual stock is its contribution to the risk of a well diversified
portfolio. The capm is calculated as follows:
ri = rf + ßi(rm - rf),	(3)
where: ri - required rate of return, rf - risk free rate, ßi - beta coefficient,
rm - market rate of return, and (rm - rf) - market risk premium.
Several shortcomings arise from the following assumptions on which
capm is based: (a) asset returns are linearly related to their covariance
with the market's return, (b) assets with higher systematic risk have
a higher return than do assets with lower systematic risk, and assets with
the same systematic risk should give the same return, (c) there is no re-
lationship between firm-specific risk and returns, because specific risk
can be eliminated through diversification (Gunnlaugsson 2006), (d) the
total risk of a stock is a combination of systematic (market) and non-
systematic (specific) risk (Antunovic 1999). McNulty at al. (2002) found
three central shortcomings of capm: (a) the validity of beta, (b) the re-
liance of historical data, (c) the indifference of holding period (Zellweger
2007). Surveys have found that the capm approach is by far the most
widely used method (Brigham and Ehrhardt 2005). The capm is, almost
certainly, the most widely used model in finance for a very simple rea-
son: it yields an essential magnitude, the return investors should require
from an asset given the asset's risk (Estrada 2005). Interesting are the re-
sults of the study that Gunnlaugsson (2006) made on the validity of the
capm on the small Icelandic stock market. They indicate that the capm
has worked well on the small Icelandic stock market and that it, or the
beta coefficient, does explain returns better than on larger foreign stock
markets. A strong relationship between the beta and stock returns was
found in the research. Further, the stock returns with high betas were
higher than one would expect, according to the capm. Nagel, Peterson
and Prati (2007) have conducted empirical tests on the different cost
of equity estimation methods based on historical returns. In the direct
comparisons of these methods, they have found that the best ex ante es-
timation method available to financial managers is essentially the capm
with beta restricted to one; that is, a naive model where the cost of equity
capital equals the risk-premium added to the risk-free rate. For the above
stated facts we decided to use the capm for the estimation of the cost of
equity capital.
data and methodology
For the estimation of the cost of equity capital we have used stock prices
for the last five years, applying the data from 1st April 2002 to 1st April
2007. For the measurement of movement of the Slovene capital market
we have used the index sbi 20. The returns of stock prices and the index
sBi 20 have been calculated for every five market working days.
With the regression analysis we have evaluated a coefficient of system-
atic risk ß which was needed for calculating of the cost of capital. Dif-
ferent financial institutions, like Thomson Financial, Bloomberg and Ya-
hoo, calculate betas in different ways and their betas are different for the
same companies. Most analysts use four to five years of monthly returns,
some use 52 weeks of weekly returns (Brigham and Ehrhardt 2005).
We have used the market risk premium from the estimated risk pre-
miums on the Aswath Damodaran web site (http://pages.stern.nyu.edu/
~adamodar/). We have calculated the risk free rate as the sum of the
Yield to Maturity the of 30-year inflation indexed Treasury Bond, which
we found on the Bloomberg web site, and the Slovene inflation, which
we obtained from the Statistical Office of Republic of Slovenia web site
(Statisticni urad Republike Slovenije 2007).
From the historical data we have estimated the expected earnings of
the valuated companies, the expected investment outlay of equity capi-
tal, the expected investments growth rate and the expected return of new
investments outlays of equity capital. For the estimation of the annual
fade rate, at which the roe's for new investments are expected to con-
verge toward the firm's cost of equity, we have used the aggregate data of
valuated companies. The aggregate data are less volatile. The big volatil-
ity of the data used has made impossible the estimation for the individual
companies in our case. This procedure has added a certain level of error
in our results. Because of the drawbacks of trend methodology that arise
from its anticipated linearity and the least squares methodology as such,
we have used a kernel estimator for the estimation of the expected value
of the parameters mentioned in this paragraph.
In order to estimate the empirical density, we made use of kernel den-
sity estimators. The goal of the density estimation is to approximate the
probability density function f (x) of the random variable X (Schoutens
2003). The outcome of this operation is a smoother empirical probabil-
ity density function (Meucci 2005). Assume, that we have n independent
observations x1, x2,...,xn from the random variable X. The kernel den-
sity estimator for the estimation of the density f (x) at point x is defined
as (4) (Schoutens 2003):
where: K((x1 - x)/h) - kernel function, x - random variable, n - number
of observations, and h - bandwidth.
We typically use the so-called Gaussian kernel (5):
(xi-x)2
In the above formula we also have to select the bandwidth h. We use
Silverman's (1986) rule of thumb value (6):
where: a - the standard error of the random variable. Due to the tran-
sition of the Slovene companies to the International Financial Reporting
Standards (ifrs 2008), the reported book value of the equity capital in
the 2006 is smaller due to different accounting rules. For certain com-
panies are even smaller in comparison to 2005, although the companies
have positive earnings and have retained a certain amount of them. This
would also have an influence on the valuation, like a smaller expected
investment outlay; therefore we have modified these data for the year
2006. Most companies have reported, together with the balance sheet for
2006, also the balance sheet for the year 2005 in accordance with the new
n
(4)
(5)
h = 1.06a« 5,
(6)
standards for the purpose of comparison. We have calculated the index
of change of the book value of equity capital. With this index we have
multiplied the reported book value for the year 2005 in accordance with
the old standards, and have obtained the estimated book value of the
equity capital for the year 2006, which the firms would have reported if
the standards had not changed. With this method we have preserved the
continuity of the course of the book value of equity capital in the time
series of data, and have also improved the estimation of the expected
growth of the equity capital investment outlays.
The valuation results were compared with the market value of the val-
uated companies. By the use of linear regression we have calculated how
much variance of the ratio of the market value and the book value of
the equity capital of the companies can be explained by the ratio of the
estimate value and the book value of the equity capital.
In the research we have presumed that the companies preserve an op-
timal capital structure and use a target capital structure also in new in-
vestments. This is significative, because it means that the cost of capital
is a constant and it will not change in the future.
Market Properties and Valuated Companies
Valuation in emerging markets is difficult. This is because of risk and ob-
stacles to business, including great economic uncertainty, illiquid capital
markets, controls of flow of capital into and out of the country, less rig-
orous accounting standards and disclosure levels, and high levels of po-
litical risk (Koller, Goedhardt and Wessels 2005). The problems with the
valuation of companies on the Slovene market arise from the smallness
of the market and from the small number of public traded companies.
Many changes in the Slovene financial area that occurred in the period of
transition indicate a short history of usable data for the analysis. The data
used from the balance sheets and income statements are very volatile and
are not a result of long-term growth and companies' tax policy. For these
reasons the valuation is aggravated.
The reason for instable financial data lies not just in companies' op-
erations but rather in the need to adapt to changing conditions and in
the frequent law changes on the Slovene market. In Slovenia an intensive
process of accepting new concepts of economic actions in the direction
from a semi command toward a market economy took part in the period
of transition (Novak 2003).
Some important properties of the Slovene equity capital market are:
•	The Slovene equity capital market is small compared to developed
capital markets. The market capitalization of the three biggest com-
panies represents 50% of the entire market capitalization of shares
which trade on the Ljubljana stock exchange. Measured on 5th April
2007.
•	It is relatively inefficient as are other segments of financial markets
in Slovenia (Dolenc 2007) and has been mostly driven (at least in its
beginning) by privatization transactions (Dolenc 2006).
•	Liquidity has risen in Slovenia in recent years, but is still low in
comparison with developed financial markets, if we compare the
turn of the market capitalization for more liquid stocks.
•	Only a small number of financial instruments are present on the
market.
VALUATED COMPANIES
We have valuated twenty Slovene publicly traded companies, the biggest
publicly traded companies in Slovenia whit shares quoted on the Ljub-
ljana Stock Exchange (2007), measured by market capitalization (the
market value of stocks on 5th April 2007). The shares of the selected
companies represent 85.5% of market capitalization of all quoted shares
on the Ljubljana Stock Exchange, measured by the market value of stocks
on 5th April 2007.
Results
the cost of equity capital
For a developed (mature) equity market we can calculate the risk pre-
mium from the historical data (historical risk premium). We can com-
pute the premium from the difference between average returns on stocks
and average returns on risk-free securities. In this case we need data over
an extended period of history to get a reasonable standard error of risk
premium estimates. Damodaran (2006) suggests long periods, 50 years
or more.
In most emerging markets, we have not had a long history of available
data. This is also the case for Slovenia (we have data for just about 15 years
and these data are under question because of big changes in the market
during the period of transition and a low liquidity of the market), so
we decided to calculate the risk premium using the method and data
we have found on the Damodaran web site (http://pages.stern.nyu.edu/
~adamodar/) as follows:
table 1 The valuated companies
Company	(1)	(2)	(3)	(4)	(5)	(6)
ach, d. d.	2,886,877	93,114	56.01	161,694	20,123	1.74
Aerodrom Ljubljana, d. d.*	1,936,229	87,564	75.82	146,805	30,501	3.29
Delo, d. d.	667,464	26,200	134.00	89,440	16,974	3.41
Gorenje, d. d.	12,200,000	270,168	35.37	431,514	751,744	1.60
Helios, d. d.	219,861	67,411	1392.91	306,247	18,703	4.54
Intereuropa, d. d.	7,902,413	156,894	36.36	287,332	131,500	1.83
Iskra avtoelektrika, d. d.	1,608,313	49,032	57.05	91,754	169,943	1.87
Istrabenz, d. d.	5,180,000	178,472	67.06	347,371	23,530	1.95
Krka, d. d.	3,542,612	622,683	882.91	3,127,808	601,308	5.02
Lesnina, d. d.	76,495	75,847	1850.00	141,516	84,429	1.87
Luka Koper, d. d.**	7,140,000	286,367	77.05	550,137	105,034	3.77
Mercator, d. d.	3,765,361	571,551	260.70	981,630	106,328	1.72
Merkur, d. d.	1,312,585	203,613	259.48	340,590	814,080	1.67
Petrol, d. d.	2,086,301	398,456	578.83	1,207,614	1,892,644	3.03
Pivovarna Laško, d. d.	8,578,391	233,072	51.97	445,819	87,048	1.91
Salus, d. d.	134,980	43,807	837.18	113,003	189,234	2.58
Sava, d. d.	2,006,987	350,162	291.32	584,675	44,167	1.67
Telekom Slovenije, d. d.	6,535,478	1,071,888	383.11	2,503,807	455,971	2.34
Terme (Čatež, d. d.	597,916	83,893	220.50	131,840	27,507	1.57
Žito, d. d.	355,792	59,300	215.43	76,648	87,917	1.29
notes Column headings are as follows: (1) number of shares of the company quoted
on Ljubljana stock exchange dated 31/12/2007, (2) book value of equity capital of the
company dated 31/12/2006 in 1000 eur, (3) market value of a share dated 5/4/2007 in
eur, (4) market capitalization of a company dated 5/4/2007 in 1000 eur, (5) overall
sales of a company in year 2006 in 1000 eur, (6) market-to-book value ratio of equity
capital of a company. * 1,860,298 preference shares (unquoted), ** 6,860,000 preference
shares (unquoted).
RPs = PTtn - = 0.5% ■ 1.5% = 0.75%,	(7)
Wgpf
where: rps - additional risk premium for Slovene market on the risk
premium for a mature market - us market, pttn - additional default
risk premium, <gd - standard deviation of stock returns for the global
market, <go - standard deviation of bond returns for the global market.
We have added the above calculated additional risk premium for the
table 2 The betas and the calculated cost of equity capital
Company	Calculated betas	Cost of
	5 years	of data		4 years	of data		3 years	of data				equity capital
	5 days 10	days 20	days	5 days 10	days 20	days	5 days 10	days 20	days	ave./?	IT	
Aerodrom Ljubljana, d. d.	0.76	0.71	0.82	1.07	1.14	1.27	1.11	1.21	1-35	1.05	O.23	10.77%
Delo, d. d.	0.63	0.58	0.69	0.69	0.71	0.81	0.72	0.65	0.59	0.67	0.0 7	8.65%
Gorenje, d. d.	1.10	1.20	1.21	1.08	1.23	1.22	1.04	1.25	1.23	1.17	0.08	11.48%
Helios, d. d.	0.77	0.81	0.84	0.79	0.83	1.01	0.82	0.84	0.93	0.85	0.07	9.63%
Intereuropa, d. d.	1.00	1.00	O.JO	1.14	1.22	0.78	1.28	1.52	0.94	1.06	0.25	10.85%
Istrabenz, d. d.	1.14	1.23	1.15	1.27	1.41	1-33	1.14	1.26	1-13	1.23	0.10	11.78%
Krka, d. d.	1.19	1.08	1.19	1.04	0.85	0.99	1.04	0.84	1.05	1.03	0.13	10.66%
Luka Koper, d. d.	1.05	1.27	1.12	1.30	1.70	1.62	1-35	1.72	1.60	1.41	0.25	12.83%
Mercator, d. d.	1.09	1.09	1.20	1.07	1.06	1.16	1.03	1.06	1.16	1.10	0.06	11.06%
Merkur d. d.	0.71	0.76	0.82	0.69	0.75	0.83	0.65	0.71	0.88	O.J 6	0.08	9.10%
Petrol, d. d.	1.14	1.03	1.00	1.25	1.09	1.06	1.27	1.06	1.01	1.10	0.10	11.07%
Pivovarna Laško, d. d.	0.76	0.71	0.74	0.76	0.87	0.85	0.68	0.86	0.83	0.78	0.07	9.27%
Salus, d. d.	0.53	0.76	O.J 6	0.49	0.73	0.77	0.44	0.63	0.69	0.64	0.13	8.48%
Sava, d. d.	0.73	0.79	0.78	0.76	0.84	0.74	0.79	0.89	O.JO	0.78	0.06	9.24%
Terme Čatež, d. d.	0.63	0.63	O.51	0.71	0.77	0.69	0.82	0.82	0.83	0.71	0.11	8.86%
Žito, d. d.	0.58	0.60	0.66	0.47	0.54	0.63	0.49	0.51	0.67	0.57	0.07	8.07%
Betas for industry for Europe from Damodaran online (2007)
ach, d. d.	Retail-Automobile
0,81
9,41%
Telekom Slovenije, d. d.
Lesnina, d. d.
Iskra Avtoelektrika, d. d.
Telecom services
Retail-Home Furnishings
Electric Products
1,03
0,90
0,71
10,66%
9,92%
8,85%
Cost of capital of the aggregate*	10,57%
notes * We have calculated the cost of capital of the aggregate with the weights multiplied by the cost of capital for the single company.
The weights are the ratio of the book value of a single company and the overall book value of the valuated companies.
table 3 Kernel estimation of the expected fade rate
		Xi	x2	x3	*4	*5	X6			
Calculated historical fade rates/	Xj	1.1971	-0.1986	-1.9222	-0.1140	0.4568	4.7058	-0.9552	—19,9160	
p. = e-(xi-x)wi ^	P,									2 Pj/nh
	Pi		0.3850	0.3338	0.3867	0.3951	0.3184	0.3665	0,0001	0,0523
	P.	0.3850		0.3779	0.3990	0.3959	0.2567	0.3949	0,0003	0,0529
	P3	0.3338	0.3779		0.3758	0.3597	0.1782	0.3923	0,0010	0,0483
	P4	0.3867	0.3990	0.3758		0.3967	0.2606	0.3939	0,0003	0,0530
	P,	0.3951	0.3959	0.3597	0.3967		0.2865	0.3847	0,0002	0,0531
	P6	0.3184	0.2567	0.1782	0.2606	0.2865		0.2216	0,0000	0,0364
	P7	0.3665	0.3949	0.3923	0.3939	0.3847	0.2216		0,0005	0,0516
	Ps	0.0001	0.0003	0.0010	0.0003	0.0002	0.0000	0.0005		0,0001
ZZPj/nh	0,3478
Expected fade rate for the agregate data of the valuated companies /
0,2831
Slovene market to the risk premium for the us market to get the risk
premium for the Slovene market.
Rp = (rm - rf) = RPzt + RPS = 4.91% + 0.75% = 5.66%,	(8)
where: rp = (rm - rf) - market risk premium, Rpzt - market risk pre-
mium for the us market, rps - additional risk premium for the Slovene
market on the risk premium for a mature market - the us market.
We have calculated the risk free rate as the sum of the Yield to Ma-
turity of the 30-year inflation indexed Treasury Bond, which we found
on the Bloomberg web site, and the Slovene inflation, which we found
on the Statistical Office of Republic of Slovenia web site (Statisticni urad
Republike Slovenije 2007) as follows:
rf = YTMfl + is = 2.43% + 2.4% = 4.83%,	(9)
where: rf - risk free rate, YTMa - Yield to Maturity of the 30-year infla-
tion indexed us Treasury bond, is - inflation in Slovenia in April 2007,
measured as an average annual index.
We could use a Slovenian treasury bond for the risk free rate but we
prefer to calculate it with the above method. The reason is that we add
a country risk premium in the calculation of a risk premium, and if we
used a Slovenian treasury bond we considered the country risk premium
twice.
With the statistical method of regression analysis we have evaluated a
coefficient of systematic risk ß which we needed to calculate the cost of
capital. To reduce the subjectivity we have calculated the average ß out
of the nine estimated betas with a different choice of data. We have used
past data for 3, 4 and 5 years and returns for 5,10 and 20 days. For the
companies with a too short history data of stock returns we have used
the betas for Europe industry which we found on the Damodaran web
site (http://pages.stern.nyu.edu/~adamodar/). The results are presented
in table 3.
In developed markets, like the us market, we can also calculate be-
tas with the above method, or simply we just look for the betas for the
companies or for industry areas on the web pages of Bloomberg, nyse,
Damodaran online or other financial web sites.
estimation of the fade rate
For estimation of the annual fade rate, at which the roe's for new in-
vestments are expected to converge toward the firm's cost of equity we
have used the aggregate data of valuated companies. The aggregate data
are less volatile. The relatively high volatility of the data used has made
impossible the estimation for the individual companies in our case. The
high volatility of reported data of the companies is due to the nature of
a fast changing emerging equity market, such as the Slovenian one, and
presumably is also true for most emerging markets. We have calculated
the fade rate from the aggregate historical data for the last 11 years for the
valuated companies with the following formula:
f=-((^14	(
where: f — annual fade rate at which the roe's for new investments are
expected to converge toward the firm's cost of equity capital, R t+i — roe
on new investments of the aggregate of the valuated companies in a year
t +1, Rt — roe on new investments of the aggregate of the valuated com-
panies in a year t, and ka — cost of capital of the aggregate.
With the kernel estimator we have evaluated the expected fade rate
from the calculated historical fade rates.
n
f j) = 28.31%.	(11)
i,j=1
The expected fade rate is very high. This means that every investment
outlay of the valuated companies will in the future earn a smaller added
value in every next period.
investment outlay of the equity capital
It = KvKLt - KvKLt-1,	(12)
where: It — investment outlay of the company equity capital in the year t,
kvlk( — book value of the company equity capital in year t, and KvLK(-1
—	book value of the company equity capital in year t - 1.
roes of the new investment outlays of equity capital
Et+1 - Et , ,
Rt = —-—,	(13)
It
where: Rt — roe of new investment outlays of equity capital in year t, Et
—	earnings of the company in year t, Et+1 — earnings of the company in
year t + 1, and It — investment outlay of equity capital in year t.
EARNINGS GROWTH RATE
Et	t ^
gd = 7--1,	(14)
Et-1
where: gd - earnings growth rate, Et - company earnings in year t, and
Et-1 - company earnings in year t - 1.
INVESTMENT OUTLAYS OF EQUITY CAPITAL GROWTH RATE
11	r ^
gl = 7--1,	(15)
It-1
where: gl - growth rate of investment outlays in year t, It - investment
outlay of equity capital in year t, and It-1 - investment outlay of equity
capital in year t - 1.
We have estimated with the kernel estimator the expected values from
the calculated historical values for the next variables: roe of the invest-
ment outlays, the earnings growth rates, and the investment outlays of
equity capital growth rates. With the expected variables and the data
from the last year we have calculated the expected earnings and the ex-
pected investment in the next period.
expected earnings
E1 = E0 (1 + gd1),	(16)
where: E1 - expected earnings in the year 2007, gd1 - estimated expected
earnings growth rate, and E0 - earnings of the company in the year 2006.
expected investment outlays
I1 = I0(1 + ga),	(17)
where: gl - estimated expected growth rate of investment outlays, I0 -
investment outlay of equity capital in year 2006, and I1 - expected in-
vestment outlay of equity capital in the year 2007.
expected decay rate of npv's of the firm's future
growth opportunities
d = f - gn,	(18)
where: gl - estimated expected growth rate of investment outlays, f -
annual fade rate at which the roe's for new investments are expected to
converge toward the firm's cost of equity capital.
table 4 Calculated and estimated variables for the valuated companies
Company	(1)	(2)	(3)	(4)	(5)	(6)
ach, d. d.	8,799.21	15,089.54	0.1153	0.1991	0.1223	0.1678
Aerodrom Ljubljana, d. d.	9,713.99	5,844.22	0.0935	0.1829	0.1036	0.1896
Delo, d. d.	2,083.69	1,112.69	-0.1270	-0.1444	0.0443	0.4101
Gorenje, d. d.	13,142.47	-1,884.84	0.0103	0.0985	0.0850	0.2728
Helios, d. d.	9,667.89	12,404.32	0.1451	0.1706	0.2441	0.1380
Intereuropa, d. d.	4,583.46	3,811.98	0.2391	0.1914	-0.0162	0.0440
Iskra avtoelektrika, d. d.	2,693.32	1,053.79	-0.1854	0.1052	0.1180	0.4685
Istrabenz, d. d.	2,302.40	11,701.01	-0.0239	-0.1488	0.0020	0.3070
Krka, d. d.	139,750.36	129,373.38	0.2843	0.2386	0.2364	-0.0012
Lesnina, d. d.	9,605.25	11,224.23	0.0749	0.1423	0.1412	0.2082
Luka Koper, d. d.	22,030.82	22,245.07	-0.0294	0.1454	0.1041	0.3125
Mercator, d. d.	26,612.18	127,614.00	0.3802	0.0106	0.1047	-0.0971
Merkur, d. d.	15,024.53	26,841.92	-0.0121	0.0618	0.1778	0.2952
Petrol, d. d.	47,074.08	48,389.99	0.3359	0.2039	0.1858	-0.0528
Pivovarna Laško, d. d.	6,196.92	22,512.59	0.1698	0.0443	0.0170	0.1133
Salus, d. d.	6,743.86	3,333.43	0.0524	0.0944	0.0572	0.2307
Sava, d. d.	28,720.98	23,287.61	-0.2684	0.1215	0.2061	0.5515
Telekom Slovenije, d. d.	115,993.13	84,469.42	-0.0829	0.0053	0.2017	0.3660
Terme Catež, d. d.	3,506.49	1,509.21	-0.4198	-0.2473	-0.0789	0.7029
Žito, d. d.	5,806.31	1,791.88	0.2389	-0.9117	0.5677	0.0442
notes Calculated variables: (1) E1 - expected earnings for the next period (1000 bE),
(2) I1 - expected investment outlays of equity capital (1000 bE). Estimated variables: (3)
gk - expected investment outlays of equity capital growth rate, (4) R1 - expected roe of
new investment outlays of equity capital, (5) gDl - expected growth rate of earnings, (6)
d = f - gi1.
We can see from table 4 that the expected decay rates for most compa-
nies are high (Luka Koper, d. d., for example have a decay rate of 31.25%).
We can conclude that the value of expected new investments (the second
part of the O'Brien formula) will have a small impact on the estimated
value of these companies.
The estimated values range from -842% of the market value for Mer-
cator, d. d., to 98% of the market value for ach, d. d. Such deviation
for the company Mercator, d. d., is due to a negative decay rate which is
close to the estimated cost of equity. We have removed Mercator, d. d.
table 5 Results of the valuation, estimated value of equity capital of the valuated
companies
Company	(1)	(2)	(3)	(4)	(5)	(6)
ach, d. d.	93,113.69	161,693.98	1.74	157,663.48	0.98	1.69
Aerodrom Ljubljana, d. d.	87,564.20	287,852.68	3.29	103,929.70	0.36	1.19
Delo, d. d.	26,199.90	89,440.18	3.41	18,118.96	0.20	0.69
Gorenje, d. d.	270,167.68	431,514.00	1.60	114,514.06	0.27	0.42
Helios, d. d.	67,411.00	306,246.59	4.54	141,322.07	0.46	2.10
Intereuropa, d. d.	156,893.91	287,331.74	1.83	61,303.07	0.21	0.39
Iskra avtoelektrika, d. d.	49,031.94	91,754.26	1.87	30,794.61	0.34	0.63
Istrabenz, d. d.	178,471.71	347,370.80	1.95	-42,801.91	-0.12	-0.24
Krka, d. d.	622,682.81	3,127,807.56	5.02	2,831,419.23	0.91	4.55
Lesnina, d. d.	75,846.59	141,515.75	1.87	112,609.06	0.80	1.48
Luka Koper, d. d.	286,367.32	1,078,700.00	3.77	178,499.28	0.17	0.62
Merkur, d. d.	203,613.44	340,589.56	1.67	142,741.35	0.42	0.70
Petrol, d. d.	398,456.34	1,207,613.61	3.03	1,129,359.44	0.94	2.83
Pivovarna Laško, d. d.	233,071.99	454,615.47	1.95	9,796.47	0.02	0.04
Salus, d. d.	43,807.00	113,002.56	2.58	80,774.33	0.71	1.84
Sava, d. d.	350,161.95	584,675.45	1.67	322,047.43	0.55	0.92
Telekom Slovenije, d. d.	1,071,888.16	2,503,806.98	2.34	918,326.79	0.37	0.86
Terme (Čatež, d. d.	83,892.92	131,840.48	1.57	32,347.17	0.25	0.39
Žito, d. d.	59,299.70	76,648.27	1.29	-104,523.41	-1.36	-1.76
Standard error (Mercator, d. d., excluded)					0.5159 1.2967	
notes Column headings are as follows: (1) book value of equity capital of a company
dated 31/12/2006 in 1000 eur, (2) market value of a share dated 5/4/2007 in eur, (3)
market-to-book value ratio of equity capital of a company, (4) Estimated value of equity
capital of a company with the O'Brian model, (5) estimated value to market value ratio
of equity capital of a company, (6) estimated value to book value ratio of equity capital
of a company.
from the further analysis. All the companies have been valuated lower
than the market value. The mean (Mercator, d. d., excluded) of the esti-
mated value to market value ratio was 33.9%. Above the mean of the esti-
mated value to market value ratio were the companies: Petrol, d. d., ach,
d. d., Aerodrom Ljubljana, d. d., Helios, d. d., Iskra Autoelektrika, d. d.,
Krka d. d., Lesnina, d. d., Merkur, d. d., Salus, d. d., Sava, d. d., Telekom
Slovenije, d. d., and the standard error of the estimated value to mar-
ket value is 51.59%. For the companies Žito, d. d. and Istrabenz, d. d. the
estimated values are negative. The reason is that the estimated expected
return on new investment outlays is lower than the estimated cost of cap-
ital, which is decreasing the value of the equity capital of the companies.
We have been interested in how much variance of the market value
of the valuated companies we can explain with the estimated value. We
have done a linear regression of the market-to-book value ratio, i. e. the
dependent variable and the estimated value to book value ratio of the
companies, i. e. the independent variable.
The resulting adjusted R2 was 0.451. This means that we can explain
45.1% of variance of the market-to-book value of the equity capital ratio
with the estimated value to book value of the equity capital ratio.
Conclusions
The aim of the research was to evaluate Slovene publicly traded compa-
nies' valuation with an O'Brian (2003) model, based on expected earn-
ings and growth opportunities. We have chosen a 'simple' model which
uses financial data from the balance sheet and income statement. The
data used for the valuation are public and accessible. We have expected a
low explained variance and small usefulness of the model on the devel-
oping and fast changing Slovene equity market. The estimated values for
the companies were very low; the estimated value of all the companies
is below the market value. The model has explained 45.1% of variance of
the market-to-book value ratio of the equity capital with the estimated
value to book value ratio of equity capital. We can say that the model has
some-altough small-explanation power in our case.
The model is based on the expected earnings and growth opportuni-
ties and we have concluded that the estimated Slovene companies' earn-
ings and growth opportunities are too small. That is why the estimated
value is in general much lower than the market value. It is possible that
in the observed years the companies have exploited to the maximum the
possibility of income tax relief and have lowered the earnings. In order to
exploit income tax relief the companies have invested in less interesting
projects with low returns. A possible solution to the problem of lowering
the earnings for the tax reasons lies in the use of a model of free cash
flows to equity for the valuation.
The lower earnings in the observed years have been due to the agent
relations. The undefined property of the companies is causing the inten-
tional lowering of the reported earnings, and in consequence the value
of the company, with the purpose of obtaining a smaller purchase value.
The earnings have been presumably lowered due to the high agency costs
on the level of owners-managers, also due to the undefined property. Till
this day in many valuated companies that we have dealt with in this re-
search the state has a large share of ownership.
The data for the model are drawn from the balance sheets and income
statements of the companies. The data are subject to accountant creativ-
ity. For this reason the valuation with such a model is under question. To
diminish this problem we have used the data for a longer period, because
the exaggerated accountant creativity is difficult to sustain. But the data
can be corrupted in certain years, thus destroying the continuity.
Taking into account the facts, we can conclude as follows. The estima-
tion of the internal value of the equity capital of the chosen companies
is not reliable. Beside this, the fact is that earnings and growth oppor-
tunities of the estimated Slovene companies are too low to confirm the
market value. The market value of the companies can be higher due to
the insider information which certain investors have, and this informa-
tion points to the higher potential of the companies than is shown by the
data from the balance sheets and income statements. The market value
can be higher due to the expected takeover at a higher price. The value
of the company as an independent economic subject is, with regard to its
potential, much smaller. The market values can be boosted by purchas-
ing in the market for speculative reasons of investors, or thinking to sell
in a short term at prices higher than the buying prices. The high market
price of the chosen companies might be higher due to the few investment
opportunities for investors on the Slovene capital market.
Suggestions for Further Research
The cash flows from the investments are usually irregularly distributed
through time - for this reason it would be interesting to repeat the re-
search every year.
It would be also useful to estimate 'comparable' foreign companies
and compare the results with those of the Slovene companies.
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The Impact of Firm Size on Dividend Behaviour:
A Study With Reference to Corporate Firms
across Industries in India
Azhagaiah Ramachandran
Veeramuthu Packkirisamy
The objective of this paper is to examine the association between the
Corporate Leverage (cl) and the Dividend Policy (dp) of firms across
industries in India in respect of Size of Corporate Firms. The inves-
tigation is conducted on a panel sample of 73 firms across industries
[Cement, Chemical and Fertilizer, it, Oil and Gas, Pharmaceutical,
Shipping, and Textiles], which listed their shares in National Stock Ex-
change (nse) in India for the period 1996-2007. The impacts of Capital
Structure (cs) variables (leverage) on dp measures - dividend payout
(Net dividend paid/net income) in the presence of some basic funda-
mental variables are considered to be the determinants of dp, using
the Multiple Regression Technique (ols method). The results of the
cross-sectional ols Model for the selected sample firms under various
sectors show that there is a significant effect of selected independent
variables, Dpoa + ^dpo^ + j62pat + j63tde + j64cf + j65size + j66inv +
jßjLTD + j68std + e. Therefore, this study proves that the dp of Small
Size, Medium Size, Large Size, and Overall Corporate Firms across in-
dustries in India is dependent on the level of debt in cs.
Key Words: capital structure, dividend policy, corporate leverage,
long term debt, short term debt, total debt
jel Classification: G30, G32, G35
Introduction
From the practitioners' viewpoint, dividend policy (dp) of a firm has im-
plications for stakeholders. For investors, dividends - whether declared
or accumulated and paid at a later date - are not only a means of regular
income, but also an important input in valuation of a firm. This implies
Azhagaiah Ramachandran is an Associate Professor at Kanchi
Mamunivar Centre for Post Graduate Studies, Pondicherry
Central University, India.
Veeramuthu Packkirisamy is a Research Scholar at Kanchi
Mamunivar Centre for Post Graduate Studies, Pondicherry
Central University, India.
that dividends may have negative consequences too for investors. Simi-
larly, the cost of raising funds is not insignificant and may well lead to
lower payout, particularly when positive net present value projects are
available. Apart from flotation costs, information asymmetry between
managers and outside investors may also have implications for dp. Fur-
ther, in the presence of information asymmetry and flotation costs, in-
vestment decisions made by managers are subject to the pecking order of
financing choices available.
One of the mechanisms of reducing expropriation of outside share-
holders by agents is high payout, which will result in reduction of free
cash flow available to managers. The presence of information asymme-
try may also mean that managers need to signal their ability to generate
higher earnings in future with the help of high dividend payouts (Bhat-
tacharya (1979), Kose and Williams (1985), and Miller and Rock (1985)).
Rozeff (1982) model payout ratios are presented as a function of three
factors: flotation costs of external funding, agency cost of outside owner-
ship, and financing constraints as a result of higher operating and finan-
cial leverage.
Statement of the Problems and Significance
The study mainly focuses on the effect of cs on dp of corporate firms
across industries in India, and seeks to answer whether the size of the
firm would appear to be one of the important factors in determining the
dividend behavior of corporate firms in India.
Review of the Literature
Since strategies are aimed at acquiring competitive strength, this requires
considerable funding, firms need to adopt appropriate financial policies
to mobilize risk capital. The cs and dp is a complex set of analysis, as
the investment decision and financing decision are important decisions
a firm should take in the course of its operation. Gordon (1959) exam-
ined the three possible hypotheses with respect to what an investor pays
for when he acquires a share or common stock that he is buying: (1) both
the dividend and the earnings, (2) the dividends, and (3) the earning. It
may be argued that most commonly he is buying for the price at some fu-
ture date, but if the future price will be related to the expected dividends.
Wilson (1967) argued that it should not be possible to increase the ex-
pected utility of one member without decreasing the expected utility of
some other member. Hagen (1973) discussed the problem of determining
an optimal dp for a firm having a set of shareholders with specified pref-
erences. An optimal dp will consequently mean a dividend payout rule,
which maximizes some utility criterion as defined by the shareholders'
preferences. Michel (1979) examined the extent to which industry divi-
dend figures affect determination of a particular firm's dp.
Woolridge (1983) analyzed the effect of unexpected dividend changes
of common stock, preferred stock, and bonds. Two potential effects are
identified: a wealth transfer effect, and a signaling effect. Kane, Young,
and Marcus (1984) found that there is a statistically significant interac-
tion effect, i. e. that the abnormal return corresponding to any earn-
ings or dividend announcement depends upon the value of the other
announcement. Miller, and Rock (1985) examined the standard finance
model of the firm's dividend decisions. The extension endogamies which
the dividend announcement affects are amply documented in recent re-
search. Ghosh and Woolridge (1989) examined the focuses on sharehold-
ers' reaction to growth-motivated cuts and omissions and stated that, al-
though growth announcements mitigate the capital loss induced by div-
idend decreases, the stock-market response to growth-oriented dividend
cuts is still strongly negative. Lim (1989) observed that dividend depends
in part on the firm's current earnings and in part on the dividend of the
previous year.
Lambert, Lanen, and Larcker (1989) found the association between
the initial adoption of stock options for senior-level executives and sub-
sequent changes in corporate dp, and suggested that dividends be re-
duced relative to expected dividends. Brennan and Thakor (1990) ex-
amined the preferential tax treatment of capital gains for individual in-
vestors; it is shown that a majority of a firm's shareholders may sup-
port a dividend payment for small distribution. For larger distribution
open market stocks repurchase is likely to be preferred by a majority of
shareholders, and for the largest distribution, tender offer repurchases
dominate. Deangelo and Deangelo (1990) analyzed the dp adjustments
of firms to protracted financial distress as evidenced by multiple losses
during 1980-1985, and found that almost all sample firms reduced div-
idends, and more than half apparently faced binding debt covenants in
the years they did so. Hodder and Senbet (1990) have developed a theory
of cs in an international setting with corporate and personal taxes and
highlighted the key role that corporate tax arbitrage plays in generating
international cs equilibrium.
Allen (1991) examined the financial managers' perceptions of the
broad determinants of listed Australian company cs decisions. The
results are consistent with Donaldson's previously reported American
findings, in that firms appear to follow a pecking order with respect to
funding sources and they also report policies of maintaining spare debt
capacity. Yener (1991) analyzed the Korean securities market's reliance
on debt financing and emphasis on debt financing as one of the ma-
jor issues related to corporate financial policy in Korea. Factors such as
persistently high international interest rates, foreign exchange rate fluc-
tuations, inflation, international competition and indications of a slow-
down in the world trade have led to increased pressure on the liquidity
of many growth-oriented Korean firms, especially in the Manufacturing
Sector. Chunchi and Kao (1992) found a significant relationship between
dividend changes and subsequent earnings. Changes in dp are interest-
ing because dividends are the focus of agency conflicts between owners
and managers of firms (Rozeff 1982).
Akhigbe, Borde, and Madura (1993) used an event study methodology
and found that the share price response for insurers is significant and
positive. The magnitude of the response for life insurers is smaller than
that of the other types of insurers or industrial firms, but is greater than
that of the banks. Papaioannou and Savarese (1994) examined, in partic-
ular, the new tax law which lowered the top personal marginal tax rate for
dividends. Johnson (1995) used recent theoretical models and suggested
that debt and dividends can serve as substitute free cash flow control or
signaling devices.
Collins, Saxena, and Wansley (1996) have recognized the potential dif-
ferences in dp between regulated and unregulated firms, and focused on
agency-cost and monitoring explanations for the relevance of dividends,
revealing that there are fundamental differences in the relationship be-
tween insider holdings and dp for unregulated firms and utilities, but
suggesting that the regulatory environment enhances rather than miti-
gates the importance of the insiders' role for utilities. Elston (1996) ana-
lyzed the importance of dp and liquidity constraints in the context of the
firm's investment behavior, suggesting that after controlling for the firm's
dividend payment, liquidity constraints remain an important determi-
nant of the firm's investment behavior. Gulati and Zantout (1997) found
that immunizing the firm's real growth potential against the effects of in-
flation and interest rate fluctuations generally requires frequent changes
in its cs.
Koch and Shenoy (1999) considered a broader distinction among three
types of firms' value - maximizing firms (Tobin's q close to 1), over in-
vesting firms (q < 1), and under investing firms (q > 1). Using this in-
terpretation of the free-cash-flow hypothesis, dividend and cs changes
should reflect a larger change in agency costs (and thus a larger informa-
tion effect) for both low and high q firms than that for firms with q values
close to 1. Feed Back Measures (gfms) found a distinct U-shaped rela-
tion between Tobin's q and the amount of predictive information con-
tained in a firm's dividend and cs policies, with a minimum at a q value
near one. Mohanty (1999) examined whether the firms offering bonus
issue have been able to generate greater returns for their sharehold-
ers than those which have not offered any bonus issue but have main-
tained a steadily increasing dividend rate, and found that a few firms
increased the dividend rate after a bonus issue, while the bonus issuing
firms fielded greater returns to their shareholders than those which did
not make any bonus issue but maintained a steadily increasing dividend
rate.
Romano, Tanewski, and Smyrnios (2000) examined the factors that
influence small-medium enterprises (sme) owner-managers' financing
decisions and found that these processes are influenced by firm own-
ers' attitudes toward the utility of debt as a form of funding as mod-
erated by external environmental conditions, in addition to a number
of other factors: e. g., culture; entrepreneurial characteristics; entrepre-
neurs' prior experiences in cs; business goals; business life-cycle issues;
preferred ownership structures; views regarding control, debt equity ra-
tios, and short- vs. long-term debt; age and size of the firm; sources of
funding for growth; and attitudes. La Porta et al. (2000) examined the
'outcome model' and found that dividends are paid because minority
shareholders pressure corporate insiders to disgorge cash; the 'substitute
model' reveals that insiders are interested in issuing equity in the future
pay dividends to establish a reputation for decent treatment of minority
shareholders.
Ooi (2001) analyzed by employing panel data methodology; the dp of
property firms quoted on the London Stock Exchange (lse) shows that
the dividend payout ratio of the average real estate corporation is dic-
tated, to a large extent, by the firm's total asset holding and leverage ratio.
Property investment firms pay significantly higher dividends when com-
pared to property trading firms. Booth et al. (2001) examined whether cs
theory is portable across countries with different institutional structures,
and provided evidence that these decisions are affected by the same vari-
ables as exist in developed countries. Kumar and Lee (2001) examined
how to develop an empirically dynamic model of discrete dp based on
an inter-temporal signaling framework, in which dividend adjustments
signal only substantial variations in the permanent earnings of the firm,
and showed that dividend smoothing is positively associated with fac-
tors such as, earnings variance, low liquidity, and high probability of
bankruptcy, as well as the expected return on capital investment by the
firm.
Goldstein, Ju, and Leland (2001) found that most cs models assume
that the decision on how much debt to issue is a static choice; however
firms adjust outstanding debt levels in response to changes in the firm's
value. Ahmed et al. (2002) examined this using both a market-based and
an accrual-based measure of conservatism, and found that the firms fac-
ing more severe conflicts over dp tend to use more conservative account-
ing; they document that accounting conservatism is associated with a
lower cost of debt after controlling for other determinants of the firm's
debt costs. John Graham and Harvey (2002) examined finance theory, as
well as aspects that are hard to reconcile and found systematic relation-
ships between corporate financial choices and managerial factors, such as
the extent of top management's stock ownership, and the age, tenure, and
education of the chief executive officer (ceo). Baker and Wurgler (2002)
found that firms are more likely to issue equity when their market val-
ues are high, relative to book and past market values, and to repurchase
equity when their market values are low. As a consequence, current cs is
strongly related to historical market values. The results suggest the the-
ory that cs is the cumulative outcome of past attempts to time the equity
market.
Stenbacka and Tombak (2002) analyzed the simultaneous investment
and financing decisions made by incumbent owners in the presence of
capital market imperfections, representing a theory for how the optimal
combination of debt and equity financing depends on the firm's internal
funds, and identity complementarities between the two financial instru-
ments. Mao (2003) presented a unified analysis that accounts for both
risk shifting and under-investment debt agency problems. For firms with
positive marginal volatility of investment, equity holders' risk-shifting
incentive will mitigate the under-investment problem, which implies
that contrary to conventional views, the total agency cost of debt does
not uniformly increase with leverage, and predicts that for high growth
firms in which the under-investment problem is severe, the optimal
debt ratio is positively related to the marginal volatility of investment.
Gugler (2003) analyzed the relationship between dividends and the
ownership and control structure of the firm for a panel of Austrian firms
over the 1991-1999 period, and found that state-controlled firms engage
in dividend smoothing, while family-controlled firms do not. Campello
(2003) examined firm- and industry-level evidence of the effects of cs
on product market outcomes for a large cross-section of industries over
a number of years, and found that debt financing has a negative impact
on firm's (relative- to-industry) sales growth in industries in which ri-
vals are relatively un-levered during recessions, but not during booms.
Graham, Lang, and Shackelford (2004) found that employee stock op-
tion deductions lead to large aggregate tax savings for Nasdaq. For s&p
firms, in contrast, option deductions do not affect marginal tax rates to
a large degree.
Anand (2004) analyzed most valuable public sector undertakings
(psus) in India to find out the determinants of the dp decisions of the
corporate firms in India, and revealed that the findings are in agreement
with Lintner's study on dp. The dp is used as a signaling mechanism
to convey information on the present and future prospects of the firm,
and thus affects its market value. Mihir et al. (2004) examined the cs
of foreign affiliates and internal capital markets of multi-national cor-
porations (mncs) and found that the mncs appear to employ internal
capital markets opportunistically to overcome imperfections in external
capital markets. Nishioka and Baba (2004), who investigated the dynam-
ics of cs of Japanese firms, found that the trade-off theory provides an
appropriate framework to assess this issue after controlling for various
variables as proxies for other hypotheses, including governance struc-
ture, the pecking order theory, and market-timing hypothesis. Among
such variables, profitability as a proxy for the pecking order theory has
significant explanatory power.
Sharma (2006), who examined the focuses on the dividend trends of
selected Indian firms, found a strong confirmation for the signaling the-
ories of Bhattacharya (1979), and Miller and Rock (1985), which gives
inconclusive results about the tax-effect theory. Graham and Tuckerb
(2006) investigated the magnitude of tax shelter activity to analyze
whether participating in a shelter is related to corporate debt policy,
and found that the average annual deduction produced by the shelters
in their sample is very large, equalling approximately nine per cent of
asset value. Faulkender, Milbourn, and Thakor (2006) presented an in-
tegrated theory of cs and dp, in which both financial policy choices are
driven by the same underlying factors and jointly determined as implicit
governance mechanisms to allocate control over real decisions between
managers and investors. Singhania (2006) examined the dividend trends
of manufacturing, non-government, non-financial, and non-banking
companies listed on Bombay Stock Exchange (bse) and found that the
tax preferences theory does appear to hold true in the Indian context in
the Indian case of both the categories of firms, i. e., regular payer and
non-regular payer, and also found that there is a significant difference
in average dividend payout ratio in the two different tax regimes, and
also that there are wide industry-wise variations in empirical findings.
Sharma (2007) offers mixed and inconclusive results about the tax-effect
theory, which is not applicable to the selected Indian firms, thus indicat-
ing that the change in the tax structure does not have a substantial effect
on the dividend behavior of firms. Kalea and Shahrurb (2007) found
that the firm's leverage is negatively related to the r&d intensities of its
suppliers and customers. Anil and Kapoor (2008) found that profitabil-
ity has always been considered as a primary indicator of dividend payout
ratio, while there are numerous factors other than profitability that also
affect the dividend decisions of an organization e. g., cash flows, cor-
porate tax, sales growth, market to book value ratio, and size. Dividend
payout ratio is positively related to profits, cash flows, and size and, it has
an inverse relationship with corporate taxes, sales growth and market to
book value ratio.
Though an ample number of research studies has been undertaken in
the field of cs and dp, very few of them have associated the effect of cs
on dp based on size of the firms. Therefore, to fill this gap in the literature
and to shed light, the present paper attempts to analyze the effect of cs
on dp, considering the size of the firms across industries in India.
Scope of the Study
The paper is an attempt to provide an empirical support to the hypoth-
esized relationship between cs and dp in respect of the size of corporate
firms across industries. Hence, the study proposes to seek answers to the
following stated questions:
• How far does the corporate firms' mix of cs policies dynamically
interact overtime to influence firms' performance with respect to
dp?
•	Is there a significant impact of cs on dp based on size?
•	How far are the cs and dp inter-related?
Objectives of the Study
•	To analyze the impact of cs on dp in respect of the size of corporate
firms across industries in India.
•	To suggest appropriate measures with respect to the inter-depend-
ence of cs and dp in respect of the size of corporate firms across
industries.
H0 There is no significant relationship between the level of debt in cs and
level of equity dividend in Cement Industry, Chemical and Fertilizer
Industry, Information Technology Industry, Oil and Gas Industry,
Pharmaceutical Industry, Shipping Industry, and Textile Industry.
H0 There is no significant relationship between the level of debt in cs
and level of equity dividend in small size firms, medium size firms,
large size firms, and all selected firms across all selected sectors.
H0 There is no significant effect of selected independent variables on dpo
of Cement Industry, Chemical and Fertilizer Industry, Information
Technology Industry, Oil and Gas Industry, Pharmaceutical Indus-
try, Shipping Industry, and Textile Industry.
H0 There is no significant effect of selected independent variables on dpo
of small size firms, medium size firms, large size firms, and all firms
under selected sectors.
Methodology
sources of data
The study used only secondary data, which are collected from cmie
[Center for Monitoring Indian Economy Private Limited] Prowess Pack-
age. The data collected from this source have been compiled and used as
per the objectives of the study.
sampling design
The study has been made on a sample of 73 corporate firms across seven
industries in India. These industries have been chosen based on a stratifi-
cation process in respect of dividend high yielding sectors. The stratifica-
tion process for the choice of corporate firms across industries has been
adopted based on the asset value of firms, i. e., corporate firms whose
total assets value has been significantly increasing over the period have
58 Azhagaiah Ramachandran and Veeramuthu Packkirisamy
table 1 Number of corporate firms chosen for the study
Industry	Number of corporate firms
Cement	12
Chemical and Fertilizer	10
iT	8
Oil and Gas	10
Pharmaceutical	15
Shipping	10
Textile	8
Total corporate firms	73
been included in the sample of corporate firms, in this way of stratifi-
cation the sample of 73 corporate firms has been arrived at, after giving
due consideration to the parameters, i. e., proper and regular dividend
payment to shareholders, and availability of required data for the study
period.
Further, the sample corporate firms are classified into three groups
based on assets value viz., small size firms - firms whose total assets value
is up to Rs. 100 crore (ten million); medium size firms - firms whose total
assets value is between Rs. 100 crore (ten million) and Rs. 500 crore (50
million); large size firms - firms whose total assets value is larger than
Rs. 500 crore (50 million).
Tools Used for Analysis
RATIOS
Short Term Debt
STD_TA = --- ■ 100	(1)
Total Assets
Long Term Debt
ltd_ta =---- 100	(2)
Total Assets
Total Debt	, s
td_ta =	—- ■ 100	(3)
Total Assets
correlation coefficient (karl Pearson's coefficient
of correlation)
r
The significance ofthe correlation coefficient = --—-- (4)
(1 - r)2(n - 2)
Degrees of freedom = (n - 2)	(5)
Correlation analysis is carried out to find out the existence of multi-co
linearity among independent variables, in order to decide what variables
can be used in the oLs regression model, or how the regression model
with all independent variables can be used.
OLS REGRESSIONS
Here, the impacts of cs variables (leverage) on dividend policy mea-
sures - dividend payout (net dividend paid/net income) in the pres-
ence of some basic fundamental variables-are considered to be the de-
terminants of dividend policy using the multiple regression technique
(ols method). Before using the ols method, the degrees of relationship
among independent variables as well as between independent and de-
pendent variables were analysed with Pearson-product moment correla-
tion. It is appropriate to use the regression technique with the step-wise
procedure, if there is any collinearity among some independent variables.
The specification of the regression model is given below:
DPO = a + ß.DPO^. + ß2PAT + ß3TDE + ß4CF + ß5siZE
+ ß6INV + ß7LTD + ß8sTD + e,	(6)
where dpo = Dividend Payout Ratio, DPot-1 = Lagged dpo, pat = Profit
After Tax (Net Income), tde = Total Distributable Earnings, cf = Cash
Flow, size = Firm Size (natural logarithm of Total Assets), inv = Capital
Expenditure, ltdta = Long-Term Debt to Total Assets, stdta = Short-
Term Debt to Total Assets, ß = estimated coefficients, a = intercept term,
e = error.
chow test
The Chow Test formula is:
[ssep - (sse, + sse2)1: k
F (k, N1 + N2 - 2k) = --p \ .-——,	(7)
(sse1 + sse2): (n. + n2 - 2k)
where ssEp = sum of squared error term for pooled model, sse. = sum
of squared error term for group 1, sse2 = sum of squared error term for
group 2, k = number of estimated parameters (including constant), n. +
n2 = n's for each of group 1 and group 2, respectively.
Period of the Study
The data used for the study relate to the selected corporate firms across
industries in India for the period of ten years, on a yearly basis ranging
from 1996-1997 to 2006-2007.
Limitations of the Study and Scope for Further Study
•	The study is limited to only 7 industries. Therefore, this comprises
the trend of only a few numbers of industries, which would not
be sufficient, totally, to generalize the inferences to the whole of a
country, India.
•	The data used for the study are secondary in nature. Therefore, the
accuracy of the results of analysis is dependent, too, upon the relia-
bility and accuracy of the compiled secondary data.
Further studies could be undertaken by future researchers in the fol-
lowing aspects and areas:
•	by undertaking studies in other industries, new and interesting in-
ferences could be found;
•	by categorizing the firms into various classes based on other bases,
proportion of capital elements, e. g., debt and equity studies, could
also be conducted.
Major Findings on Across-Industry Analysis
Tables 2 to 9 present the results of regression analysis for sample firms
under seven sectors.
It is evident (see table 2) that lagged dividend payout has a significant
positive effect on dpo (ß = 0.2605, t = 2.77, p < 0.01) and inv has a
significant negative impact on the dependent variable (ß = -0.0697, t =
-2.03, p < 0.05). This shows that the dividend payout in the previous
year plays a vital role in determining the current year dividend payout
of sample firms under Cement Sector. However, the increase in capital
expenditure decreases the level of dividend payout significantly. In the
full model with addition of cs variables, only the said variable is found
to have a significant coefficient with dpo.
None of the debt variables has a significant impact on dpo, as their
coefficients are insignificant. However, coefficient of determination is
found to have increased by two per cent. So, [Chow-test] F is calculated
to find whether there is a collective impact of those two cs variables on
dpo. The F is found to be insignificant, providing strong evidence that
cs does not have any effect on dp in terms of distribution of dividend
payout relative to net income of the sample firms under Cement Sector.
Therefore, h0 in respect of Cement Sector is rejected, as Dpot-1 has a
positive impact at 1% level (0.2605), and inv has a negative impact at
table 2 Results of Cross-Sectional oLs Model for sample firms under Cement Sector
(mean values in %)
Independent variable	Reduced Model		Full Model	
	Coeff.	t-value	Coeff.	t-value
Intercept	9.3640**	2.11	25.7511**	2.04
DPot-1	0.2605***	2.77	0.2342**	2.46
pat	0.0170	1.50	0.0107	0.88
tde cf Size	0.0298	1.63	0.0329	1.79
	—	—	—	—
inv	-0.0697**	-2.03	-0.0697**	-2.03
ltd_ta	—	—	-0.2628	-1.56
std_ta	—	—	-0.0577	-0.19
R2	0.1462		0.1680	
Adjusted R2	0.1131		0.1185	
F-value	4.41***		3.340***	
	4.103		6.101	
Chow Test F-value			1.32	
			2.101	
notes *** Significant at 1% level, ** Significant at 5% level, * Significant at 10% level.
5% level (-0.0697) in the reduced model; with respect to the full model
DPot-1 (0.2342), and inv (-0.0697) at 5% level.
The regression analysis (see table 3) shows that both, the reduced
model and the full model, are fitted significantly (F-value = 3.70, p <
0.01 and F = 2.70, p < 0.05). The reduced model fitted with only lagged
dpo, pat, tde and cf, and together explaining 14.84 per cent of the
variation in dpo (R2 = 0.1484). The coefficients of pat with positive sign
and of tde with negative sign are significant. That is, net profit increases
the dpo, and any increase in tde decreases it. The negative relationship
between tde and dpo indicates that the sample firms under this indus-
try have reduced dividend payout when a portion of net income is held
for future investments (Reserve and Surplus). With the best-fitted (re-
duced) model, leverage variables are added and the full model is run. R2
value has increased but the significance of pat and tde has disappeared.
Further, none of the coefficients of the debt variable is found to be sig-
nificant, revealing that they do not have a unique impact on dpo after
table 3 Results of Cross-Sectional oLs Model for Sample Firms under Chemical and
Fertilizer Sector (mean values in %)
Independent variable	Reduced Model		Full Model	
	Coeff.	t-value	Coeff.	t-value
Intercept	26.2192***	4.81	35.0989***	3.14
DpOt-1	0.1954	1.65	0.2300*	1.82
pat	0.0676*	1.92	0.0452	1.12
tde	-0.0188**	-2.23	-0.0150	-1.61
OF	0.0132	1.57	0.0150	1.76
inv	—	—	—	—
ltd_ta	—	—	-0.1525	-0.75
std_ta	—	—	-0.4550	-1.08
R2	0.1484		0.1632	
Adjusted R2	0.1084		0.1028	
F-value	3.70*** 4.85		2.70** 6.83	
Chow Test F-value			0.73ns 2.83	
notes *** Significant at 1% level, ** Significant at 5% level, * Significant at 10% level.
partialling out the effect of some characteristics of firms. But the negative
sign of the coefficient has shown that increase in debt financing in cs is
likely to reduce the dpo. F (Chow) for both ltd and std reveals that
there has been an increase in R2 value of the full model. But, F (Chow)
is found to be insignificant, providing evidence that cs does not play a
vital role in determining the dividend payout relative to net income of
sample firms under the Chemical and Fertilizer Sector. Hence, hJ is re-
jected in respect of pat at 10% level (0.0676), and tde negatively at 5%
level (-0.0188) in reduced model; with respect to the full model DPot-1
(0.2300) at 10% level for Chemical and Fertilizer Sector in respect of pat
and tde.
The analysis shows (see table 4) that the reduced model, even after
step-wise procedure, is not fitted significantly. But coefficients of ex-
planatory variables in the model are significant at a level of 10 per cent.
This may be due to the existence of high collinearity between pat and
tde. The significant negative coefficient of lagged dpo indicates that
payout of dividend from net income is reduced if dividend payout in
table 4 Results of Cross-Sectional ols Model for Sample Firms under Information Technology Sector (mean values in %)				
Independent variable	Reduced Model		Full Model	
	Coeff.	t-value	Coeff.	t-value
Intercept	70.8656	2.76	80.2616	3.00
DPOt-1	-0.0737*	-1.81	-0.0603	-1.41
pat	0.0237**	2.12	0.0196*	1.66
tde cf Size	-8.7622*	-1.85	-9.3753**	-1.96
	—	—	—	—
inv	—	—	—	—
ltd_ta	—	—	-0.2897	-1.20
std_ta	—	—	-0.0894	-0.18
R2	0.0736		0.0983	
Adjusted R2	0.0327		0.03	
F-value	1.8ons		1.44***	
	3.68		5.66	
Chow Test F-value			0.90	
notes *** Significant at 1% level, ** Significant at 5% level, * Significant at 10% level.
the previous year is high. The full model with leverage variables is also
not fitted significantly, and explanatory power of the model (R2 values) is
higher when compared to that of the reduced model. But the significance
of lagged dpo has disappeared in the presence of leverage. The negative
sign of leverage variables reveals that there are chances of reduction in
dpo with increase in debt fund. On the whole, it is found that sample
firms belonging to Information Technology Sector have kept giving divi-
dends, irrespective of their performance. Hence, hJ is rejected in respect
of DPOt-j negatively at 10% level (—0.0737) and pat at 5% level (0.0237),
and tde negatively at 10% level (-8.7622) in reduced model for Infor-
mation Technology Sector; with respect to the full model pat (0.0196) at
10% level, and tde negatively at 5% level (-9.3753).
The analysis (see table 5) shows that both the reduced (F-value = 10.40,
p < 0.01) and full models (F-value = 7.21, p < 0.01) for Oil and Gas Sector
are fitted significantly at 1 per cent level.
The explanatory variable in the reduced model explains 26.63 per cent
of the variable in dpo. Also, the coefficients of lagged dpo (ß = 0.4485, p
table 5 Results of Cross-Sectional oLs Model for sample firms under Oil And Gas
Sector (mean values in %)
Independent variable	Reduced Model		Full Model	
	Coeff.	t-value	Coeff.	t-value
Intercept	14.0944***	4.72	20.8602***	3.69
DpOt-1	0.4485***	4.53	0.3920***	3.86
pat	0.0032*	1.69	0.0030	1.56
tde OF Size	-0.0005	-1.39	-0.0005	-1.49
	—	—	—	—
INV	—	—	—	—
ltd_ta	—	—	-0.1809*	-1.87
std_ta	—	—	-0.0710	-0.57
R2	0.2663		0.3002	
Adjusted R2	0.2407		0.2585	
F-value	10.40***		7.21***	
	3.86		5.84	
Chow Test F-value			2.03	
			2.84	
notes *** Significant at 1% level, ** Significant at 5% level, * Significant at 10% level.
< 0.01) and pat (ß = 0.0032, p < 0.10) are significant with a positive sign.
From the significant positive co-efficient of these variables, it is inferred
that the increase in net profit kept increasing the dividend payout every
year among the sample firms under Oil and Gas Sector. The explanatory
power of the full model with addition of leverage variables is found to
have increased by 3.39 per cent (R2 = 0.3002 when compared to R2 =
0.2663 for the reduced model). Also the coefficient of leverage variable,
ltd_ta is significant positively (ß = -0.1809, p < 0.10), indicating that
the dividend payout has come down to a significant level when there
has been a considerable increase in debt financing in cs from long-term
sources.
However, both the leverage measures together failed to explain vari-
ation in dpo, as F (Chow) (F = 2.03, p > 0.10) is insignificant, i. e., the
sample firms under Oil and Gas Sector have not considered the status
of debt financing in cs before distributing a part of their net income as
dividend. Hence, h0 is rejected in respect of Dpot-1 positively at 1% level
table 6 Results of Cross-Sectional ols Model for Sample Firms under Pharmaceutical Sector (mean values in %)				
Independent variable	Reduced Model		Full Model	
	Coeff.	t-value	Coeff.	t-value
Intercept	30.5227**	2.35	27.3356**	2.10
DPot_1	0.4011***	4.86	0.3999***	4.90
pat	-0.0396	-1.28	-0.0276	-0.88
tde	0.0180**	2.38	0.0190**	2.44
cf	-0.0044	-0.94	-0.0099*	-1.87
size	-3.4379	-1.41	-3.6663	-1.48
inv	—	—	—	—
ltd_ta	—	—	0.0018	0.02
std_ta	—	—	0.4469**	2.15
R2	0.2001		0.2285	
Adjusted R2	0.1691		0.186	
F-value	6.45***		5.37***	
	5.129		7.127	
Chow Test F-value			2.34*	
			2.127	
notes *** Significant at 1% level, ** Significant at 5% level, * Significant at 10% level.
(0.4485) and pat at 10% level (0.0032) in the reduced model; with respect
to the full model DPot_1 positively (0.3920) at 1% level, and ltd_ta neg-
atively at 10% level (-0.1809) in respect of DPot-1, pat and ltd_ta for
Oil and Gas Sector.
The full model with inclusion of leverage variables of sample firms
under Pharmaceutical Sector is fitted significantly with the coefficient of
determination to the extent of 22.85 per cent (R2 = 0.2285, F = 5.37, p
< 0.01). Further, in the full model the effect of cf becomes significant
with a negative sign (ß = -0.0099, p < 0.01). Between leverage variables,
the coefficient of std_ta is significant positively at 5 per cent level (ß
= 0.4469, p < 0.01). Therefore, the sample firms kept the dividend pay-
out on the positive side when they have sizeable fund in reserves and
surpluses through borrowing from short-term sources even if there has
been a marginal decline in pat as well as a notable decline in cf. The
F result (Chow) (F = 2.34, p < 0.01) [significant] reveals that cs with a
sizeable level of short term fund and meagre level of long-term fund have
table 7 Results of Cross-Sectional ols Model for Sample Firms under Shipping
Sector (mean values in %)
Independent variable	Reduced Model		Full Model	
	Coeff.	t-value	Coeff.	t-value
Intercept	7.2854**	2.31	1.2477	0.26
DpOt-1	0.4928***	5.54	0.4392***	4.70
pat	-0.0382	-1.38	-0.0327	-1.17
tde cf Size	0.0066	1.04	0.0057	0.90
	—	—	—	—
inv	0.0203	1.48	0.0161	1.16
ltd_ta	—	—	0.2320*	1.77
std_ta	—	—	0.0205	0.04
R2	0.3033		0.3292	
Adjusted R2	0.2705		0.2807	
F-value	9.25***		6.79***	
	4.85		6.83	
Chow Test F-value			1.60	
			2.83	
notes *** Significant at 1% level, ** Significant at 5% level, * Significant at 10% level.
significant explanatory power on the dpo of sample firms under Phar-
maceutical Sector. Hence, hJ is rejected in respect of DPot-1 [positively
at 1% level (0.4011)] and tde at 5% level (0.0180) in the reduced model;
with respect to the full model DPot-1 [positively (0.3999)] at 1% level,
and tde at 5% level (0.0190), cf negatively at 10% level (-0.0099), and
std_ta positively at 5% level (0.4469) in respect of Dpot-1, tde, cf, and
std_ta of Pharmaceutical Sector.
The firms under Shipping Sector are significantly positively related to
lagged dpo (r = 0.5243, p < 0.01) and ltd_ta (r = 0.3546, p < 0.01).
Only pat and tde (r = 0.9196, p < 0.01) and tde and inv (r = 0.8412, p
< 0.01) are collinear with each other. In order to know which is superior
over the other in explaining dpo when otherwise held constant, pat,
tde and inv are included in the reduced model, and step-wise proce-
dure is carried to get the model of best fit. The results (see table 7) show
that the degree of collinearity between pat and tde has come down to
marginal level in the presence of lagged dpo and inv (capital expendi-
ture), because these two variables are found in the reduced model even
after the step-wise process. All the four explanatory variables in the re-
duced model could explain to the extent of 30.33 per cent of variation
significantly in dpo (F-value = 9.25, p < 0.01).
As far as the estimated co-efficient of the explanatory variables, in the
reduced model, are concerned, only the co-efficient of lagged dpo (ß =
0.4928, p < 0.01) is significant positively, which reveals that the sample
firms under Shipping Sector have kept increasing the dividend payouts
over the period when all others are held constant. The full model with cs
proxies, ltd_ta and std_ta is also fitted significantly with a co-efficient
of determination at 32.92 per cent in dpo (R2 = 0.3292, F-value = 6.79,
p < 0.01). Also, the co-efficient of ltd_ta is significant positively at 10
per cent level (ß = 0.2320, t = 1.77, p < 0.01). This reveals that the sample
firms under Shipping Sector have kept paying dividend irrespective of
the level of increase in debt fund in cs through long-term financing.
The difference in explained variance (R2) between the two models is not
significant (Chow F = 1.63 is insignificant), indicating that the influence
of long-term debt financing on dpo has disappeared with a marginal
increase in short-term fund in cs. Hence, there is no impact of cs on dp
of the sample firms under Shipping Sector, and therefore h0 is rejected
in respect of Dpot-1 positively at 1% level (0.4928) in the reduced model;
with respect to the full model Dpot-i positively (0.4392) at 1% level, and
ltd_ta positively at 10% level (0.2320) of Shipping Sector.
In respect of sample firms under Textile Sector, no multi-collinearity
among the independent variables is found, and the dpo is not correlated
with all the variables, providing evidence that distribution of part of the
net income as dividend is independent of earnings, cash flow, and debt
fund in cs. However, the analysis shows that the reduced model with
coefficient of determination to an extent of 7.75 per cent (see table 8) is
fitted significantly (R2 = 0775, F-value = 2.90, p < 0.10), whereas the full
model is not, though there has been a marginal increase in the explained
variation with inclusion of cs variables (R2 = 0.0810, F = 1.47, p > 0.10 -
insignificant). But the significant co-efficient of pat (ß = 1.9594, t = 2.11,
p < 0.05) with a positive sign and that of tde (ß = -0.3547, t = -2.13, p <
0.05) with a negative sign in both the models indicates that dpo is more
than that of the net profit, and dividend paid from the total distributable
earnings without considering the debt financing in cs for Textile Sector.
Hence, h0 is rejected in respect of pat positively at 5% level (1.9594),
and tde negatively at 5% level (-0.3547) in the reduced model; with re-
table 8 Results of Cross-Sectional ols Model for Sample Firms under Textile Sector (mean values in %)				
Independent variable	Reduced Model		Full Model	
	Coeff.	t-value	Coeff.	t-value
Intercept	20.3188***	2.98	21.4650	0.80
DpOt-1	—	—	—	—
pat	1.9594**	2.11	1.9488**	2.01
tde cf Size	-0.3547**	-2.13	-0.3929*	-1.97
	—	—	—	—
inv	—	—	—	—
ltd_ta	—	—	0.0265	0.07
std_ta	—	—	-0.1521	-0.31
R2	0.0775		0.0810	
Adjusted R2	0.0508		0.0261	
F-value	2.90*		1.47ns	
	2.69		4.67	
Chow Test F-value			0.13	
			2.67	
notes *** Significant at 1% level, ** Significant at 5% level, * Significant at 10% level.
spect to the full model, pat positively (1.9488) at 5% level, and tde nega-
tively at 10% level (-0.3929). Hence, H0 is rejected in respect of the effect
of pat and tde on dpo of Textile Sector.
Firm Size-Wise Analysis
The relationship between dp measured as dpo (dividend payout paid/net
income) and cs for sample firms with small, medium and large size total
assets is analyzed and the results are shown in tables 9-12. dpo is pos-
itively related with lagged dpo (r = 0.1953, p < 0.05), pat (r = 0.1950,
p < 0.05), tde (r = 0.1680, p < 0.10), and negatively associated with cf
(r = -0.1793, p < 0.10) and inv (r = -0.3634, p < 0.01). From significant
correlation coefficients, it is found that the current year dpo has im-
pacted on the previous year dpo, increase in pat and decrease in capital
expenditure (inv) among small size sample firms.
With regard to the unique impact of control and debt variables, the
results of regression analysis using reduced and full model for small size
table 9 Results of Cross-Sectional oLs Model for small size firms under all selected
sectors (mean values in %)
Independent variable	Reduced Model		Full Model	
	Coeff.	t-value	Coeff.	t-value
Intercept	23.6180***	5.61	18.5859***	2.73
DpOt-1	0.2350**	2.04	0.2323**	2.00
pat	0.4259	1.64	0.4732*	1.77
tde	—	—	—	—
Size	—	—	—	—
inv	-1.1126***	-3.78	-1.1996***	-3.81
ltd_ta	—	—	0.1216	0.89
std_ta	—	—	0.1182	0.47
R2	0.1927		0.2003	
Adjusted R2	0.1675		0.1578	
F-value	7.64***		4.71***	
	3.96		5.94	
Chow Test F-value			0.45	
			2.94	
notes *** Significant at 1% level, ** Significant at 5% level, * Significant at 10% level.
sample firms across the selected sectors reveal (see table 9) that both the
reduced model (R2 = 0.1927, F = 7.64, p < 0.01) and full model (R2 =
0.2003, F = 4.71, p < 0.01) are fitted significantly, explaining to an extent
of 19.27 per cent and 20.03 per cent of the variation respectively for the
reduced model and full model in respect of dpo. The co-efficient of pat
is significant at the level of 10 per cent, which shows that the lagged dpo
and pat have a positive effect on dpo when there has been a decline in
capital expenditure (inv).
Whereas, the co-efficient of ltd_ta and std_ta is not significant,
revealing the fact that the dpo is independent of the debt level in cs
of small size sample firms, which supports the significance of both the
leverage variables in explaining the dpo (F of Chow test is insignificant).
Hence, h0 is rejected in respect of Dpot-1 positively at 5% level (0.2350),
and inv negatively at 1% level (-1.1126) in the reduced model; with re-
spect to the full model Dpot-1 positively (0.2323) at 5% level, pat at 10%
level (0.4732), and inv negatively at 1% level (-1.1996) for Small size firms
table 10 Results of Cross-Sectional ols Model for medium size sample firms under
all selected sectors (mean values in %)
Independent variable	Reduced Model	Full Model
	Coeff.	t-value	Coeff.	t-value
Intercept	36.8846	1.64	34.5672	1.46
DpOt-1	0.1634**	2.55	0.1592**	2.47
pat	-0.1142*	-1.78	-0.1196*	-1.67
tde	0.0582**	2.13	0.0479	1.22
cf	0.0418**	2.04	0.0442**	2.14
Size	-5.2592	-1.20	-4.2581	-0.82
inv	-0.0660	-1.26	-0.0688	-1.31
ltd_ta	—	—	-0.0664	-0.66
std_ta	—	—	0.1230	0.73
R2	0.0577		0.0628	
Adjusted R2	0.0354		0.0329	
F-value	2.58**		2.10**	
	6.253		8.251	
Chow Test F-value			0.68	
			2.251	
notes *** Significant at 1% level, ** Significant at 5% level, * Significant at 10% level.
under all selected sectors. Therefore, the dp of small size sample firms
across all selected sectors is independent of the level of debt in cs.
The regression model for medium size firms is fitted significantly (see
table 10) with all the control variables, but together they explain to an
extent of 5.77 per cent of the variation in dpo (R2 = 0.0577, F = 2.58, p <
0.05). The co-efficient of lagged dpo (ß = 0.1634, t = 2.55, p < 0.05), tde
(ß = 0.0582, t = 2.13, p < 0.05) and cf (ß = 0.0418, t = 2.04, p < 0.05) is
significant positively, and that of pat (ß = -0.1142, t = -1.78, p < 0.10) is
significant negatively in the reduced model.
In the presence of leverage variables (full model), the statistical signif-
icance of tde has disappeared. Therefore, there has been a continuous
increase in dpo when there has been an increase in tde and cf, even if
there is a decline in pat when the status of debt is not taken into con-
sideration. However, with marginal decrease in ltd and considerable in-
crease in std, the medium size firms have not considered tde before
distributing dividend payout to shareholders. Hence, cs and dp are un-
table 11 Results of Cross-Sectional ols Model for large size firms under all selected
sectors (mean values in %)
Independent variable	Reduced Model	Full Model
	Coeff.	t-value	Coeff.	t-value
Intercept	14.8011***	7.37	18.9381***	5.58
Dpot-1	0.4380***	7.89	0.4390***	7.90
pat	—	—	—	—
tde	—	—	—	—
cf Size	—	—	—	—
inv	—	—	—	—
ltd_ta	—	—	-0.1238*	-1.78
std_ta	—	—	-0.0455	-0.37
R2	0.1741		0.1830	
Adjusted R2	0.1713		0.1747	
F-value	62.21***		21.88***	
	1.295		3.293	
Chow Test F-value			1.60	
2.293
notes *** Significant at 1% level, ** Significant at 5% level, * Significant at 10% level.
related with each other in the case of medium size sample firms of all
selected sectors. (F of Chow test is insignificant), and therefore reject-
ing h0 in respect of DPot-1 positively at 5% level (0.1634), pat negatively
at 10% level (-0.1142), tde positively at 5% level (0.0582), and cf posi-
tively at 5% level (0.0418) in the reduced model; with respect to the full
model Dpot-1 positively (0.1592) at 5% level, pat negatively at 10% level
(-0.1196), and cf positively at 5% level (0.0442). Hence, there is a signif-
icant effect of Dpot-1, pat, tde, and cf on dpo in medium size sample
firms under all selected sectors.
The full model regression analysis with step-wise approach for large
size sample firms, in which leverage variables as proxy for cs are in-
cluded, is fitted significantly (see table 11) explaining to the extent of 18.30
per cent of the variation in dpo (R2 = 0.1830, F = 21.88, p < 0.01).
Besides, ltd_ta has a unique significant negative impact on dpo (ß =
-0.1238, t = -1.75, p < 0.10). However, there is a lack of collective impact
of both leverage variables on dpo (F of Chow test is significant). Hence,
table 12 Results of Cross-Sectional oLs Model for all sample firms under all selected
sectors (mean values in %)
Independent variable	Reduced Model		Full Model	
	Coeff.	t-value	Coeff.	t-value
Intercept	15.3441***	11.17	19.6463***	8.00
DPot-1	0.3094***	7.79	0.3010***	7.56
pat	0.0013	1.36	0.0006	0.61
tde	—	—	—	—
Size	—	—	—	—
inv	—	—	—	—
ltd_ta	—	—	-0.1117***	-2.43
std_ta	—	—	-0.0070	-0.08
R2	0.0889		0.0972	
Adjusted R2	0.0861		0.0917	
F-value	31.91***		17.55***	
	2.654		4.652	
Chow Test F-value			3.00**	
			2.652	
notes *** Significant at 1% level, ** Significant at 5% level, * Significant at 10% level.
h0 is rejected in respect of DPOt-1 positively at 1% level (0.4380) in the
reduced model; with respect to the full model DPot-1 positively (0.4390)
at 1% level, ltd_ta negatively at 10% level (-0.1238) for large size firms
under all selected sectors. The distribution of dividend payout is inde-
pendent of the cs between debt and equity of the large size sample firms
across all selected sectors.
It is evident from the result of regression analysis for all sample firms
pooled together (see table 12) that both, the reduced model as well as
the full model are fitted significantly, explaining to the extent of 8.89 per
cent (R2 = 0.0889, F = 31.91, p < 0.01) and 9.72 (R2 = 0.0972, F = 17.55, p
< 0.01) variation in dpo respectively. In the reduced model, only lagged
dpo and pat are retained by step-wise procedure. Between the estimated
co-efficient, it is significant positively only for lagged dpo (ß = 0.3094, t
= 7.79, p < 0.01). The co-efficient, though positive, is not significant for
pat, indicating that the pat has a unique negligible effect on dpo in the
presence of the previous year's dpo status. However, in the presence of
leverage variables, though present with insignificant co-efficient, the de-
gree of unique relationship of pat with dpo has decreased heavily. At the
same time, the co-efficient of lagged dpo is significant at 1 per cent level
(ß = 0.3010, t = 7.56,p < 0.01). Besides, between ltd_ta and std_ta, the
coefficient of ltd_ta is significant negatively (ß = -0.1117, t = -2.43, p <
0.05) at 5 per cent level. The difference in explained variance between the
full model and the reduced model (difference in R2) is also significant at
5 per cent level (Chow F = 3.00, p < 0.05). Hence, it is found that all the
sample firms across all selected sectors keep distributing dividend if it is
done so in the previous years, and increase/decrease in dpo is based on
the level of debt fund in cs. Hence, H0 is rejected in respect of Dpot-1
positively at 1% level (0.3094) in the reduced model; with respect to
the full model Dpot-1 positively (0.3010) at 1% level, ltd_ta negatively
at 1% level (-0.1117) as there is significant impact of Dpot-1, ltd_ta
on dpo in all sample firms under all selected sectors, therefore dp in
terms of dividend payout is significantly influenced by the cs of firms
in India.
Concluding Remarks
This study examines the impact of firm size on the dividend behaviour
of corporate firms in India, and has been carried out on 73 firms by em-
pirically analysing the determinants of dp over a wider testing period
from 1996/1997 to 2006/2007. Dividend behaviour was tested using the
full-Britain model and its variants on the pooled cross sectional/time se-
ries data for the sample of observations from 1996/1997 to 2006/2007. The
models are estimated using the Ordinary Least Square (ols) method.
Dividend stocks are expected to provide a combination of dividend
cash flows and capital gains from the investors' view. The preference of
shareholders for one or the other should have a powerful influence on
decisions regarding dividend payment, which leads one to examine the
extent to which dividend payments and dividend yields vary significantly
across firms, industries and time. Firms come in various sizes and shapes,
and they could be single-owner enterprises or large mncs with many
shareholders cutting across geographical boundaries. The management
of each firm normally makes dp, but the nature of the ownership can
play an important role in dp decision.
While investors concentrate their attention on dividend yield, man-
agement pays more attention to the impact of dividend payouts on the
firm's capital needs. A high dividend pay out reduces firm's access to re-
tained earnings, which is often viewed as the lowest cost source of capital.
For that reason, management may prefer lower dividend payout ratios,
but must recognize the realities imposed by shareholders' preference for
at least some payment of dividends. According to the traditional view of
cs, when a firm's leverage exceeds the optimum cs, its cost of capital in-
creases. Shareholders will want more dividends and more money will be
needed to meet interest obligations to debt holders, the weighted aver-
age cost of capital will be high and the firm's liquidity position may be
affected and growth retarded.
The purpose of this study was to empirically analyse the extent to
which the perceived theory about the conventional determinants of div-
idend behaviour of corporate firms explains the dividend behaviour of
quoted firms across industries in India with respect to size. The effects
of firm size, growth prospect and the level of gearing on dividend be-
haviour of firms have been analysed. The dividend behaviour of corpo-
rate firms in India's emerging market seems to be significantly influenced
by a number of factors, which substantially differ from what is common
in developed countries.
Irrespective of the sector, the relationship between the cs and dp re-
mains same, i. e in most of the cases the impact of cs measures, viz.,
ltd_ta, std_ta, and td_ta on dp is unique. The hypothesis which
formulated that 'there is no significant relationship between the level of
debt in capital structure and level of equity dividend' has been rejected
in almost all the sectors. The inter-correlation matrix among variables
in the regression models for various sectors also supports the conclu-
sion that there is impact among the independent variables chosen for
the study. The results of the cross-sectional ols Model regression for the
selected sample firms under various sectors also show that there is a sig-
nificant effect of selected independent variables [dpo = a + ß iDPOt-i +
ß2PAT + ß3TDE + ß4cF + ß5siZE + ß6iNv + ß7LTD + ß8sTD + e] on the
dividend pay out.
The study proves that the equity dividend percentage and the debt
financing in cs are inversely related to each other in most of the sectors.
Besides, the cs of sample firms significantly influences dividend payout
across all selected sectors when pooled together, but sector-wise and size-
wise, there is an insignificant relationship between dp and cs. Therefore,
it is concluded that the dp of small size, medium size, large size, and
overall corporate firms across industries in India is independent of the
level of debt in cs.
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Change Management in Adult Educational
Organizations: A Slovenian Case Study
Romana Martincic
Successful implementing and managing of change is urgently necessary
for each adult educational organization. During the process, leading
of the staff is becoming a key condition and the most significant fac-
tor. Beside certain personal traits of the leader, change management
demands also certain leadership knowledges, skills, versatilities and be-
haviour which may even border on changing the organizational culture.
The paper finds the significance of certain values and of organizational
climate and above all the significance of leadership style which a leader
will adjust to the staff and to the circumstances. The author presents a
multiple qualitative case study of managing change in three adult edu-
cational organizations. The paper finds that factors of successful lead-
ing of change exist which represent an adequate approach to leading the
staff during the introduction of changes in educational organizations.
Its originality/value is in providing information on the important re-
lationship between culture, leadership styles and leader's behaviour as
preconditions for successful implementing and managing of strategic
change.
Key Words: change management, educational organization, leadership,
process of changes, qualitative research
jEL Classification: 110, mio
Introduction
The only constant of the time we live in are the changes in all areas of our
life and work. They are incited by a number of factors: technological ad-
vancement, changed expectations and needs of the clients, changed mar-
ket conditions, changing of legislation, changed social values etc. (Paton
and McCalman 2000); no organization - large or small, local or global
- is immune to change (Kotter 1998b). Educational organization must
follow the opportunities and avoid the threats which occur in the con-
temporary turbulent environment. The changing of legislation and reg-
ulation of education entails change implementation in a special manner
'from the top downwards.' An educational organization has little or no
Romana MartinCic is a Director's Human Resources Assistant at the
University Clinic of Respiratory and Allergic Diseases Golnik, Slovenia
influence on such change. Its task is more or less to respond to change, as
it has no choice but to operate in accordance with the rules. Much more
interesting for the long term efficiency of an organization is the change
that originates from the organization itself as a premeditated, planned
activity caused by various reasons: fewer pupils and students, young or
adults, the need to improve the quality in education or to introduce new
formal or informal forms of education etc.
Several authors (Fullan 2001; Bukovec 2005; Coleman 1994; Drucker
1999; Kotter and Cohen 2003; Tracy 1999) claim that successful imple-
menting and managing of change depends on the leadership style. The
changes in organizations represent a major challenge to leaders, as the
quality of leadership is proved in the course of implementing change.
The central topic of this research was to study implementing change
from the point of view of leadership in three adult educational organi-
zations. As leadership is a highly complex phenomenon its exploring has
been approached holistically and the leadership styles were put into the
context of a situation and of the prevailing organizational culture. The
radical/strategic change, which represents fundamental transformation
of the steady manners of operation in an adult educational organization,
was placed into the focus of interest.
Leading change in educational organizations is not really a frequent
topic in the literature and, when it is, it deals more with the permanent
improvement of work in schools (Leithwood, Jantzi and Steinbach 1999;
Davies 2002) and less with leading radical change, such as implementing
completely new educational programmes or new activities. This aspect
is very important for many Slovene adult educational organizations.
Management vs. Leadership
For further reference in this paper, the leadership and management will
be considered as two different processes, as differentiated by Hersey and
Blanchard (1993). According to these authors a narrower and a broader
meaning are attributed to leadership. They maintain that 'management
is thought of as a special kind of leadership in which the achievement of
organizational goals is paramaount [...] Leadership occurs any time one
attempts to influence the behaviour of individuals or group regardless
of the reason.' Leadership is defined as one of the functions of manage-
ment whereby a manager will apply all available resources including the
human resources. The essence of leadership is in influencing them and
in inter-action between a leader and staff. Several authors (Dubrin 2004;
Dessler 2001; Tavcar 2000b; Yukl 1998; Možina et al. 1996) define manage-
ment as a process of planning, organizing, leading and supervising of the
members of organization. Leading represents just one of the functions or
tasks of a manager (Tavcar 2000a).
But all these numerous definitions have a common basis: leadership is
influencing the staff. No matter how efficient the leader is he/she can not
achieve results without people. The activities and tasks in organizations
are getting more and more sophisticated and that is why people are of
crucial importance. 'The leadership is not a person or a position, [...]
it is a complex, paradoxical and moral relationship between people [...]
which can cause harm between some groups, accompanied by benefits
to others [...] and is based on trust, obligation, commitment and vision
- nobody can be a leader without willing followers' is the definition of
leadership by Rosenbach and Taylor (1998, 2-4, quote acc. to Storr 2004,
416).
One of the most difficult tasks is implementing and managing change,
which requires the leaders to have certain personal traits of: being a risk
taker and politically astute, having charisma and confidence, offering in-
spiration, and taking ownership of the initiative (Chrusciel 2008). Lead-
ers are expected to: have versatility and skills, adjust of leadership style
to the situation and the staff, and demonstrate efficient behavioural pat-
terns.
CHALLENGES OF LEADING CHANGE
When distinguishing between management and leadership in accor-
dance with the above definitions, a conclusion can be drawn that lead-
ership as a 'softer' principle of management is a crucial factor in imple-
menting change. Bukovec (2005) maintains that management suffices
to control the gradual changes, and leadership is necessary when an or-
ganization seeks to implement radical/strategic change. Kotter (1998a)
suggests eight critical stages to take into account when implementing
radical change:
•	Establish a sense of urgency: If people are not made aware of the
importance of change, they will simply not cooperate in the process
of changing.
•	Form a powerful guiding coalition: This means, to assemble a group
of dedicated individuals who will pledge their influence and knowl-
edge to introduce change.
•	Create a vision that will help direct the change effort.
•	Communicate the vision and instilling enthusiasm into people to
make them comprehend the significance and purpose of the change.
•	Empower employees to undertake important tasks.
•	Plan for and achieve short-term wins to reinforce momentum.
•	Consolidate improvements and produce still more change.
•	Institutionalize new approaches and ways of work - to make sure
that the desired changes become part of the organizational culture.
Because of the complexity of the contemporary situations the lead-
ers have to focus on five basic ingredients of efficient leadership (Fullan
2001):
•	Moral purpose: a leader is to be directed by a moral purpose which
is manifested in caring for and in endeavouring to improve the life
of the staff, of clients and of society as a whole.
•	Understand the change process: not understanding of the process of
change only leads to failures; the good ideas only will not be suf-
ficient. The leader must uderstand how to implement good ideas.
Doing so, to control the troubles that may occur at the beginning of
introducing changes, the leader must if necessary change the orga-
nizational culture.
•	Relationship building is of crucial importance for successful intro-
duction of changes. Without good relationships, things will deteri-
orate. Aiming to solve problems, an efficient leader will endeavour
to cooperate with his/her staff.
•	Knowledge creation and sharing; a leader shall stimulate the staff to
engage in permanent learning and acquiring new knowledge. The
employees are not supposed to keep their knowledge to themselves.
They must share it for the benefit of a succesful solution of prob-
lems.
•	Coherence making: is leaders' permanent task, since in the culture
of changes which is accompanied by inequilibrium and instability,
leading of staff is a most demanding job.
Leadership in an educational organization has its peculiarities. Teach-
ers, advisors and organizers are comparatively well educated and ex-
pect a certain amount of autonomy in their work. The concept of dis-
tributed leadership has been much debated and heavily promoted within
the school sector (Harris 2007). The core of school leadership practice
is direction setting (Jacobson et al. 2005). Scheerens (1998) emphasizes
some forms of leadership in education and defines the main fields of ac-
tivity of a leader in educational organization. A leader has to support
all innovative efforts in an organization and to reward efficient work. A
leader has: to understand the process of changing (Andrews, Cameron
and Harris 2008), to determine the reasons for possible failure in im-
plementing change and to be in control of strategies to cope with the
resistances (Cook 2009). A leader (manager/headmaster) of an educa-
tional organization who endeavours to achieve the progress of all partic-
ipants in education, promotes the professional development of teachers
and other staff and is himself/herself willing to learn, becomes a catalyst
of change.
Starting-Point of Qualitative Research
A qualitative and quantitative paradigm which emerged from two philo-
sophical bases, phenomenology and positivism, is being discussed in the
literature. Essentially, a positivist believes that the reality which is ob-
served exists independently of the researcher (Easterby-Smith, Thorpe
and Lowe 2003). As opposed to positivism, there engaged the phe-
nomenological approach, which is called social constructionism by the
same authors. Here the researcher is not supposed only to collect facts
and to find out the frequency of phenomena, but also to discover how
people perceive the reality and what significance they attribute to it.
Alvesson and Deetz (2000) maintain that it is easier to comprehend mi-
cropractices from daily life through qualitative - also called interpretative
- research methods.
The primary goal of this type of research is an empirical description
and deep understanding of a limited part of the existing social real-
ity with the added ambition of stimulating moderate (modest) social
changes. Leading is by its natural role a process - oriented permanent
activity which is, for this very reason, easier to research with qualitative
methods (Merriam 1998; Cassel and Symon 2005). The classical positivist
approach, which deals with the social world as a world independent of
individual perception of the researcher (Toš and Hafner-Fink 1998), is
almost inadequate for research of leadership.
The process aspect of leadership requires predominantly open ques-
tions, where the answers are sought above all in personal discussions with
people who know a great deal about the subject of the research. In qual-
itative research, the research material is compiled in the form of verbal
descriptions and also processed and analysed verbally without using the
measuring procedures.
METHODOLOGY
The research was conceived as a multiple qualitative case study (Mer-
riam 1998; Yin 1994). In the literature, the synonym collective case study
has also been found (Silverman 2005; Stake 1995). In a multiple case
study each individual case is contemplated as a single case and finally
as a whole, and remains inside the same methodological framework (Yin
1994). General recognitions which fit to all cases are sought. A case study
or a study of a small number of cases will be inevitable when the aim
is an in-depth understanding of the situation. It is an intense, complete
description and analysis of an individual unit, of a case, or of the whole,
e.g. of: individual, event, group, or community (Merriam 1998). Basi-
cally it is an enquiry in a real life context, as opposed to the contrived
context of experiment (Yin 1994).
The validity of qualitative research is designated by the term credi-
bility which comprises the substantiation of the selection of procedure
(Tratnik 2002), and by its trustworthiness. The validity of the present
research is enhanced with the following: (1) triangulation; three educa-
tional organizations and inside them three different information sources
(managers/headmasters, deputies and staff), (2) exact tapescripts of in-
terviews, (3) accurate organizing of the material to obtain the records
(documentation) of an individual case.
The research aims to determine an efficient approach towards manag-
ing change. What leadership approach is prevailing in the selected orga-
nizations and how does it affect the implementing and control of change?
Which are the crucial factors of efficient leadership? The selected educa-
tional organizations differred in characteristics significant for the pur-
pose of the research. A public and a private adult educational organiza-
tion and an educational centre, or its unit for adult education, were in-
cluded. The research comprised headmasters (managers), their deputies
in all three educational institutions and seven professionals, three from
each educational institution and one from an educational centre. Among
the professionals, there were organizers of education and teachers in the
educational programmes for adults. The selection of samples in phe-
nomenological research is somewhat different from the selection in the
positivist approach. Merriam (1998) maintains that selection of a non-
probability intentional sample is based on the assumption that the in-
vestigator wants to discover, understand and gain insight into the phe-
nomenon. That is why a sample needs to be selected so that it provides
the most information. Because in those organizations which were will-
ing to cooperate the selected sample was practical, and due to relevance
of the included individuals, it was intentional. The data in the research
were collected by semi-structured interview.
The basic questions for interviews were:
•	Can you enumerate a few major/strategic changes that you have im-
plemented in the past five years?
•	Can you describe how the changes were implemented?
•	How was the leading of staff conducted during the time of imple-
menting change?
•	How would you define the organizational culture in your organiza-
tion?
Where appropriate, these questions were supplemented with ad-
ditional questions during the interview to direct it, above all to the
following: reasons and initiatives for changes, visions regarding the
change, possible resistance and conflicts, communication and adop-
tion of changes, organizational culture, values, relationships, climate
and leadership styles. Additional topics or fields that were of interest,
were noted in the form of a memorandum which induced me to en-
sure that the interviews in all three organizations were conducted in
approximately the same way. This is what Yin (1994, 45) stands for and
calls 'strategy of repetiton.' The analysis of the data was carried out ac-
cording to the method suggested by Miles and Huberman (1994) in the
framework of general analytical procedure. The analysis using a mul-
tiple case study has a few peculiarities. Merriam (1998) speaks of two
stages: the first is analysis of each individual case, i. e. within-case anal-
ysis, and the other is cross-case analysis. The latter 'strives to establish
a general explanation that fits each of the individual cases even though
they may differ in details' (Yin 1994, 112). The advantage of cross-case
analysis lies in greater generalization and in-depth understanding and
explanation.
There have been few researches in this field. The present study is the
first in the country and should serve as a basis for further research. The
study has some limitations. Each educational organization is a case of its
own and that is why the generalization may present one of the limita-
tions. When working with a sample of only three educational organiza-
tions, it is difficult to reach conclusions that can be readily generalized to
other settings.
Results of the Research
The data were categorized in the following thematic sets or categories:
(1) reasons for changing, (2) characteristics of the process of implement-
ing change, (3) culture of educational organizations, and (4) factors of
successful managing of change. A completed thought, word or sentence
of the interviewed was a unit to be evaluated.
REASONS FOR CHANGES
All organizations involved had introduced changes at their own ini-
tiative. They were not forced by legislation or regulations adopted by
schools authorities, but instead by their own concern to maintain com-
petitivness. According to what they said, they managed to do so with new
and up to date programmes (curricula) and better quality of teaching.
One of the managers said:
The technological changes with the clients were the reason why
the programmes had to be changed. People who were educated
on the basis of old curricula simply could not get employ-
ment as they lacked new knowledges and did not command
the modern communication technology.
Another manager said:
[...] we were forced into changes by the development of ed-
ucation of adults in Slovenia and by social, economical and
political changes. Among other reasons were also the concern
for the quality and reputation of the organization and [...] due
to a decrease in the number of the students in their organiza-
tion they had to look for a market niche to replace the 'drying
programmes.'
Table 1 presents concisely the reasons for changes.
The major reasons for implementing changes in the public adult ed-
ucational organization eo (1) were connected with quality and develop-
ment and consequently with an increase in enrollment of students. The
private adult educational organization eo (2) was seeking for reputation
and image. The most important reasons for change in educational cen-
ter eo (3) have been caused by the need to adjust to new educational
programmes.
Change Management in Adult Educational Organizations 87
table 1 Reasons for changes
eo (1) • General social, economical and political changes
•	Decrease in the enrollment and thereby decrease in the scope of work of the
staff
•	Searching the market niches
•	Concern about the quality and the desire to improve and to develop
eo (2) • Acquiring reputation/maintaining the image in the environment
•	Searching for market niches in connection with the economic situation
eo (3) • Technological changes with clients who enter the educational programmes
•	Adjusting of education to the needs of work (adequately educated people
will be more employable)
characteristics of the process of implementing
change
The replies showed that the original initiative for implementing change
originated from the managers, who then presented them to their close
team. Two of the managers and three of the staff specifically pointed
to the manager's efforts and his stimulating others to contribute their
views and initiatives. The final success of implementing change depends
largely on these initial steps, which include a thorough consideration of
the necessity of implementing change and of the need to select the 'right'
people above all people who possess expertise in the field touched by the
change and to whom a change represents a certain challenge. As one of
the directors said, he selects people 'in whose line a certain topic is,' and
eventual the possible lethargy of individuals at the beginning he over-
comes with 'somewhat more authoritative leadership.' Another manager
coped with the initial aversion to change by involving the staff in sys-
tematic training to acquire the knowledge neccessary for implementing
changes. To the question as to who on the staff had been included in the
project team for change, he replied that 'above all those who have certain
professional knowledge.' An additional criterion in selecting them was
also their propensity for changes, i. e. 'they have a desire to make things
better,' he said. But he did not entirely exclude those who were in oppo-
sition, as they too need 'to be convinced of necessity of changes' if these
were to be successful.
The research showed that resistance is an inevitable evil which may
lead to serious conflicts which probably each leader implementing change
will have to face. It is interesting that in the two smaller organizations
(public and private organizations), there were no serious aversions to-
wards change. The staff was aware of the seriousness of the situation
and of the need for new programmes of higher quality which would
be interesting for the prospective clients. As one of the managers said,
'his colleagues were highly understanding in accepting different and ad-
ditional tasks,' among others also for fear of losing the job in case of
a decreased number of students enrolled. A few more troubles turned
up in the third organization. The reason for them was described by the
manager in a few sentences:
One of the most difficult things is to change a teacher. To move
his centuries long-concentration on one subject was a major
problem that needed to be tackled. Other hindrances were of
technological nature such as introducing computers at work,
improving and updating programmes for administrative and
technical operating of the school, and finally organization of
management itself.
The deputy said that inside the adult education department no resis-
tances had been perceived as they were 'a small group which had been
operating as such for over a decade.' Further he said that 'there were
more difficulties with negotiating between the adult education depart-
ment and the comparatively large group of employees engaged in regular
education or in the education of young people.'
The organizer of adult education was even more specific in her replies.
She said: 'Communication between the adult education department and
the educational centre as a whole has always been difficult [...] things
stuck already when the changes were in the stage of presentation to the
whole staff.' Further she said that she 'literally had to work separately
with each teacher' as they 'contemplated adult education as if it did not
belong in the educational system,' she continued. Their manager also said
that they tried to motivate people for the planned change at conferences
and by means of workshops, which was not convincing enough - not
even for sceptics, let alone the opponents. He had to use 'his authority'
and had 'to address each individual by means of personal contact,' he
added.
The responses indicated that there is no simple recipe for coping with
resistances. The respondents had often underlined the significance of
communication. The change needs to be presented to all employees, they
need an explanation of what it means and what it will bring to them,
the necessity of change needs to be pointed out and substantiated with
various arguments. One of the managers even claimed that 'the initial
comprehensive information' is crucial.
CULTURE OF EDUCATIONAL ORGANIZATIONS
AND THEIR VALUES
The responses showed that changes in educational organizations are
strongly related to the prevailing culture, which is comprised of or-
ganizational structure, common values, leadership style and organiza-
tional climate. These 'soft approaches' seem particularly important for
the teaching staff. One of the managers said: 'With an authoritative ap-
proach in the project or in the school no change can succeed.' An au-
thority always suffocates the creativity, and without creativity there can
be no introducing novelties and improvements. In spite of the fact that
the employees in the educational organizations are directed by different
values, and that these organizations are differentiated also by organiza-
tional structure, a common core, on which implementing change can
be built, could be observed in the three organizations which were the
subject of the research. This common core consists of democratic rela-
tionships, mutual respect and trust which serve for more efficient and
successful implementing of change.
All respondents agreed that the organizational structure has a consid-
erable, if not outright the largest impact on implementing change in their
respective organizations. Further they agreed that a prevailing culture
can impede or assist the endeavours for changing. One of the deputies
defined the culture as 'knowledge, habits and values which the employ-
ees with longer work experience pass down to the younger colleagues.'
She pointed out the importance of a respectful relationship, which seems
to be significant for the welfare of all employees and thereby 'affects their
creativity and good performance.' In her opinion, 'people always have to
express loyalty to the organization' for which they work. Further she em-
phasized that expressing loyalty to the organization is demonstrated not
only by carrying out the tasks, but also in other ways by showing pride in
being employed in the organization and with enthusiasm for achieving
the common goals.
The culture was rated as democratic and cooperative in all involved
organizations. All professionals replied that they 'can express opinions'
and that they are given due consideration.' Beside cooperation, the trust
of the teachers and organizers in the management and vice versa is like-
wise important. Trust is a glue that amalgamates the staff and makes pos-
sible that success of cooperation. As one of the professionals said: 'You
cannot do anything on your own. You must work jointly with a team of
colleagues. Trust and the feeling that you can rely on them is very impor-
tant here.'
Kindness, helpfulness and flexibility were a few of the values on which
the participants laid stress. They said that they placed the participants
of the education and taking care of them as the first of the daily tasks
in the focus of the teaching process. One deputy of the headmaster said
that they 'are not treated as mere numbers', but that in fact the staff re-
ally takes an interest in them. She also stressed: 'The important values
that direct their work are expertise, accuracy, responsibility, respectful
mutual relations and a positive climate. The latter is also a reason for the
employees' loyalty to the organization for which they work.'
FACTORS OF SUCCESSFUL LEADING OF CHANGE
In the interviews, all the professionals in staff also reported that their
'directors adjust the leadership style to the situation and to the peo-
ple.' Most of the time, they practice the participative and democratic but
sometimes also the authoritative style. The research found that at the
start of implementing change the managers had to apply a more author-
itarian style to overcome staff resistance.
During the preparation for change, it is of supreme importance that a
vision, i. e. a clear picture of future is created and presented in detail to
the staff. One of the managers said: 'And when I finally have the whole
picture in my mind I present it to my subordinates with much enthusi-
asm and energy.' During the discussion, the three organizers of education
maintained that 'an early involvement of the persons to carry out the in-
troduction of change is important for successful implementing of change
and for achieving commitment of the staff to change.' Also the selection
of the team is very important. One of the managers stressed: 'People with
inadequate knowledge and those who are strongly opposed to the change
may jeopardize the whole project or programme.'
During the implementation constant motivation and control of achiev-
ing the interim objectives are necessary. The motivation for work, also in
cases when major obstacles or problems turn up which may demotivate
the staff, can according to all three managers be achieved 'with their own
enthusiasm and by setting a good example.' They said that they all 'in-
volved the organizers of education and teachers and the coordinate team
in individual activities.' One of the managers said:
Change Management in Adult Educational Organizations 91
table 2 Factors for Successful Leadership
eo (1) • Including people in the early stage of preparation and not only in the stage
of implementation
•	'Maintaining' motivation for change
•	Open communication
•	Participation of the organizers of education and teachers in decision making
•	Coordinating team and individual activities
eo (2) • Presentation of a clear picture for the future
•	Open communication
•	Coordinating team and individual activities
•	'Maintaining' motivation for change
•	participation of the organizers of education and teachers in decision making
eo (3) • Including suitable people in a team
•	Open communication
•	Coordinating team and individual activities
•	'Maintaining' motivation for change
•	Participation of the organizers of education and teachers in decision making
•	Consolidation of the introduced change
•	Motivating for creative solving of problems
With some members of the team, I had to deal authorita-
tively and with others I had to check their exaggerated enthu-
siasm ... I personally communicated with the colleagues and
kept repeating to them how significant small steps are and the
successes connected with them [...] but when the new pro-
gramme was introduced this was not the end, for the change
needed to become a routine.
Table 2 presents factors for successful leadership in a particular educa-
tional organization. As we can see, the most important factors according
to respondents are: (1) open communication, (2) motivation for change
in all steps of implementation, (3) participation of employees in decision
making, and (4) coordinating of team and individual activities.
Managers and staff in the researched organization had different opin-
ions about how to introduce changes more efficiently. One of them
thought that everybody has to act in the direction of change or, as he
expressed it: 'We must all breathe with the idea because otherwise it will
fail.' Another one added: 'It is necessary to support creative people who
have ideas.' In the opinion of one professional, 'in schools more attention
should be paid to development and creative problem solving.' The re-
spondents emphasized the 'importance of motivation and the necessary
enthusiasm for changes that it requires.' According to them, the 'changes
are easier introduced by creative people who like to do something new.'
Also a climate which is in favour of development and novelties acceler-
ates introducing changes.
Achieving the final result is a long-term and demanding task for all
people involved. The comparative distance of the goal may have a demo-
tivating effect and that is why it is important to maintain the motivation
by pointing out 'small' victories.
The managers saw the key to successfully introducing the changes in
the mode of leadership which is sometimes more people oriented. This
was illustrated by the following statements:
In my opinion it is necessary to get acquainted with the team
with whom you work, listen to their opinions and only then
take up the tasks regarding the changes.
In change management/leadership some values will help - the
first is respect for the colleagues, the second is loyalty to the
collective. In my opinion, respect is the most far reaching, and
honesty, fairness and kindness too.
Efficient change management is affected by the openness and
accessibility of the manager.
Conclusions and Recommendations for Practice
A manager/headmaster exercises a considerable influence on implement-
ing change. With his/her personal characteristics - trait, actions and
manner of leading of the staff - he/she may accelerate or decelerate the
pace of introducing the changes. With faithfulness to the vision and val-
ues of the educational organization, with openness to learning, with
strategic ponderation and by promoting cooperation among the staff,
he/she may efficiently introduce change. The leadership performance re-
quires adjustment of style to the staff and situation (Leithwood, Jantzi
and Steinbach 1999). We cannot expect the manager to be omnipotent,
yet it is clear, however, that his/her leadership is an important condition
in implementing change.
The research showed that managers of the organizations involved are
aware of the importance of the market in education and of adjusting
educational programmes to the ever more demanding requirements of
enterprises and individuals. Moreover, these managers are well aware of
their active role in the development of their own educational institution.
In working with people, or in merely being in contact with them, they
do not swear by 'hard' methods, e. g. dictating, enforcement, rivalry, and
punishment. Instead they are in favour of the soft method of leading,
i. e. stimulating, showing the challenges, motivating, rewarding, healthy
competition and cooperation. Their two trump cards are openness, and
to a certain extent the charisma which induce the staff to do the best for
the common good. Strategic thinking is manifested in their initiative for
changes.
According to some authors (Kotter 1998a; Kotter and Cohen 2003), the
important thing is that the managers know how to instil enthusiasm into
their colleagues who are sufficiently trained, competent, show interest
and are in favour of changes. They cope with the resistances in differ-
ent ways: by involving the professional staff at the very beginning, when
the vision of change is being prepared, by substantiating and persuading
about the necessity, even the inevitability of change, and by emphasizing
the first successes the moment the change produces them. In this way the
fainthearted will be convinced about what can be changed and what can
not.
The adult educational organizations which were the subject of the re-
search are marked with a specific organizational culture and structure by
which the organizations are essentially differentiated. Cooperation, open
and relaxed communication, mutual trust, expertise and placing the per-
son, - the subject of education -, in the centre of the process of teaching,
from the nucleus of common characteristics of organizational culture.
This has led to successful implementation of the planned changes in the
organizations which were researched.
The findings can be summed up as follows:
•	Implementing changes in the researched educational organization
is closely linked to the organizational cultures and prevailing values.
•	Leading changes is connected with the leading of staff, where the
headmaster/manager plays a decisive role.
•	The headmaster/manager has to be familiar with the process of
changing and with its stages.
•	In implementing changes, the headmaster/manager has to consider
the important factors of successful leading of changes.
The research findings confirm that implementing changes in educa-
tional organizations requires managers who, in addition to having man-
agement talents, also have a well developed leadership trait which in crit-
ical moments moves things from a standstill. This is possible by making
their staff enthusiastic, by stimulating them, by connecting with one an-
other, by offering support and by giving them the necessary feeling that
success is guaranteed in spite of interim difficulties.
Communication was considered very important. In the opinion of
participants in the present study, it was practically always inadequate. In
the individual steps of implementing change, work should be inspected
and the stages discussed in detail. The professionals in the staff could
have more influence in deciding on the change to be implemented. This
would ensure that a change would be accepted as if it were their own idea
and its implementation would be much easier.
A thorough consideration about the necessity of change would often
prevent tension among the employees, and the sensibleness of simulta-
neous involvement in various projects which are demanding in terms of
funding, personnel and equipment, would be determined at the begin-
ning.
The leadership styles did not prove less appropriate at the time of im-
plementing change. Adequate adjustment of various leadership styles:
democratic, participative and authoritative and adjustment of leading to
the groups and individuals proved to be an efficient leadership mode
in uncertain times entailed by change. A generic leadership approach is
not desirable, because it denies the impact of context (Werkman 2009).
An authoritarian style of leading was suitable at the beginning of imple-
menting change. With a somewhat more formal approach it was possi-
ble to overcome or to control the initial passiveness or minor resistances
of the employees. The employees must accept the novelties and changes
and consider them as their own. This will only happen if the staff par-
ticipates in decision making which refers to changes. The staff needs to
be involved as early as possible in the preparation of visions regarding
the change. Only in this way will they stick to the initial inclination to
changes and endeavour to implement them throughout the process of
changing.
The four themes serve as a powerful framework to help headmas-
ters/managers develop a leadership philosophy that enables a success-
ful implementation of change in an adult educational organization. Al-
though there is no single answer as to how to lead change in an educa-
tional organization, these guiding principles, developed from practices
of successful adult educations, can serve as a framework for individuals
who want to institute change management practices within their organi-
zations.
The findings for these cases have important implications for the prac-
tice and preparation of change leaders/agents in educational organiza-
tions.
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Understanding iso's 9001 Benefits and Research
through an Operations Strategy Framework
Borut Rusjan
Pavel Castka
Despite the success that the iso 9001 standard has achieved it has been
extensively criticized and empirical studies have shown controversial
results about its impact on performance. Our conceptual study was
motivated by the mentioned dilemma about iso 9001 effectiveness, and
the controversy that this dilemma raises in literature on the one hand
and on the other by almost exponential growth of certifications among
companies world-wide. It is our opinion that in order to understand
results related to iso 9001 implementation we need to take a step back
from empirical research and instead try to analyze iso conceptually by
taking into account also the results of empirical studies implemented
in the past. The purpose of the paper is to clarify the purpose of im-
plementation of iso 9001 and, in relation to this purpose, to analyze
different possible benefits resulting from its implementation. In order
to achieve this purpose our goal is to analyze the criticism of the old
iso 9001:1994 by using a specific framework of the operations strategy
theory. The paper emphasises that in accordance with its conformance
purpose, iso 9001 is successful in building conformance capability and
that by using iso 9001 practices companies can also benefit in relation
to production economics through improved process efficiency and to
other competitive capabilities. It also emphasises that empirical results
expected from iso 9001 implementation are strategy contingent and
therefore this should be taken into account in designing empirical stud-
ies about iso's benefits.
Key Words: iso 9001, quality assurance, conformity, standards
jEL Classification: L15, M10
Introduction
Since its introduction in 1987, the iso 9001 standard for quality manage-
ment systems has made a huge intprint on global economy: there are one
million firms certified by the standard, the standard has been adopted
Borut Rusjan is an Associate Professor at the Faculty of Economics,
University of Ljubljana, Slovenia.
Pavel Castka is an Associate Professor at the College of Business and
Economics, University of Canterbury, New Zealand.
globally as well as in most industry sectors. The number of firms adopt-
ing the standard has been growing constantly and many firms still en-
courage their supply chain partners to seek certification. Therefore im-
plementation of the iso 9000 series probably represents one of the most
widely used systems for achievement of transition towards improved or-
ganizational managerial systems. On its journey the standard has been
revised three times - in 1994, 2000, 2008. Especially the 2000 revision
was significant.
The literature review shows that the empirical research of implemen-
tation issues and results of iso 9001:1994 has been extensive (for reviews
of iso 9001:1994 empirical research see for example Curkovic and Pagell,
1999; Santos and Escanciano 2002; Quazi et al. 2002; Angel R. Martinez-
Lorente and Micaela Martinez-Costa 2004; van der Wiele et al. 2005). De-
spite the overwhelming popularity of iso 9001:1994, there has been con-
siderable confusion and frustration surrounding the role and business
value of iso 9000 certification (Terziovski, Samson, and Dow 1997). Ad-
ditionally the iso 9000:1994 model has received harsh criticism from the
perspective imposed by the total quality management concept, and the
literature identified several critical areas, requirements of a quality man-
agement system which were not included in the iso 9000 requirements
(Curkovic and Pagell 1999; Martinez-Lorente and Martinez-Costa 2004;
Sroufe and Curkovic 2008). Empirical studies also researched the bene-
fits and implementation problems of the new version of iso 9001:2000
(Magd and Curry 2003; Biazzo and Bernardi 2003; Casadesus and Kara-
petrovic 2005; van der Wiele et al. 2005; Magd 2008; Feng and Terziovski,
and Samson 2008), however the empirical research related to results of
iso 9001:2000 did not show a very optimistic picture either.
Singh (2008) claims that 'whilst popular, iso 9000 is not beyond re-
proach. There is no clear-cut evidence of its effectiveness.' 'In general,
studies investigating the effects of iso 9000 on performance have shown
mixed results' (Martinez-Costa, Martinez-Lorente, and Choi 2008), but
more importantly iso 9000 appears to selectively affect certain types of
performance (Singh 2008). Especially empirical observation on the fi-
nancial and business performance impact of iso 9000 certification have
yielded inconsistent results (Singh 2008; McGuire and Dilts 2008). This
implies that there is a need for better understanding of the benefits that
can be achieved through implementation of iso 9000.
Our conceptual study was motivated by the above mentioned dilemma
about iso 9000 effectiveness, and the controversy that this dilemma
raises in literature on the one hand, and on the other hand with the al-
most exponential growth of certifications among companies world-wide.
It is our opinion that, in order to understand results related to iso 9001
implementation, we need to take a step back from empirical research and
instead try to analyze the iso conceptually by taking into account also
the results of empirical studies implemented in the past. The purpose of
the paper is to clarify the purpose of implementation of iso 9001 and
in relation to this purpose to analyze different possible benefits result-
ing from its implementation. In order to achieve this purpose our goal
is to analyze the criticism of the old iso 9001:1994 by using a specific
framework of the operations strategy theory. This framework has been
well defined and accepted within operations management research and
therefore it has been used as a comparison basis within analysis of iso
9001. Identification of problematic situations within analysis requires
identification of an appropriate comparison basis. Justification for using
operations strategy as a reference framework is presented in the analysis
part of the paper.
The analysis draws upon a conceptual theoretical and empirical re-
search base, developed within operations strategy research on the one
hand, and on the other hand the paper also builds on an extensive em-
pirical research basis related to implementation issues and benefits of iso
9001:1994 and 2000.
The Journey from the 1994 Revision to 2000 Revision
The iso 9000 quality assurance standards were first issued in 1987
and revised in 1994 by the International Organization for Standardiza-
tion (iso). Historically, iso 9000 stemmed from the need to rational-
ize quality issues in contractual, business-to-business (or business-to-
administration) relations (Conti 1999). Larson and Häversjö (2001) have
pointed out that the standard with its origin in defence purchase had a
clear focus on assuring that the company supplying the defence order
was able to deliver. The supplier should study the order submitted ('con-
tract review') and make sure that they understood and delivered as de-
scribed. No more, no less. The initial aim behind the iso 9000 series was
to build confidence between suppliers and manufacturers in business-
to-business transactions and in international trade (van der Wiele et al.
2005). Therefore, as Tummala and Tang (1996) clearly stated, there is
one and only one core value for iso 9001:1994, namely, conformance to
specified requirements.
But besides this external benefit there has also been an important po-
tential internal benefit for organizations that have implemented the stan-
dard. In its origin, iso 9001 standard was also concerned with efficiency
in an indirect way, by assuring deliveries as promised. By its emphasis
on up-stream and in-process checks and by prevention it would help to
reduce negative quality costs and in this partial way contributes to effi-
ciency (Larson and Häversjö 2001).
But despite that, the iso 9000:1994 version has been extensively criti-
cized. First stream of criticism has been conceptual. Within this stream
researchers identified deficiencies of iso 9001:1994, mostly on the basis
of its comparison with either the most important tqm elements or di-
rectly with quality awards models such as the Malcolm Baldrige Award
Model and European Quality Award Model (Tummala and Tang 1996).
Researchers that analyzed iso 9000:1994 based on comparison with tqm
mostly shared the view that iso 9000:1994 certification's requirements
represent the minimum common factor for any quality system (Santos
and Escanciano 2002; Magd 2008), and as already explained it was con-
sidered as insufficient in relation to several critical areas:
•	Product quality: Certification does not ensure that the product is
of high quality, or attractive to the consumer (Curkovic and Pagell
1999; Santos and Escanciano 2002; Magd and Curry 2003).
•	Customer focus and competitive advantage: the iso series does not
include a strong customer satisfaction and market focus (Curkovic
and Pagell 1999; Santos and Escanciano 2002; Gotzamani, Theodor-
akioglou, and Tsiotras 2006; Sroufe and Curkovic 2008).
•	Continuous improvement: iso 9000 has limited focus on and does
not explicitly support continuous improvement (Curkovic and Pag-
ell 1999; Biazzo and Bernardi 2003; Martinez-Lorente and Martinez-
Costa 2004; Sun et al. 2004; Gotzamani, Theodorakioglou, and
Tsiotras 2006).
The second stream of criticism of iso 9000:1994 has been related to
empirical research showing that there is no clear empirical confirmation
that iso is improving company performance (Terziovski, Samson, and
Dow 1997; Sun 2000; Singels, Ruel, and van de Water 2001; Santos and
Escanciano 2002; Martinez-Costa and Martinez-Lorente 2007). Also this
type of criticism has been related to lack of iso implementation results
based on the perspective of expected results from the implementation of
a tqm system.
This criticism, based on the comparison of iso and broader tqm ap-
proaches, seemed to have an important effect on the content of reforma-
tion of iso standards, although some of the researchers emphasized that
quality awards models (as representatives of broader tqm approaches)
and iso 9000 standards differ fundamentally in focus, purpose, and
content and that companies should choose one or the other (Kartha
2004). Mostly, however, researchers were quite harmonious in evaluat-
ing revisions in the iso 9000:2000 as a positive step in the right direc-
tion for solving/improving deficiencies discovered/embedded in the iso
9000:1994 series. The prevalent opinion has been that the changes pro-
posed were in areas that in particular would assist organizations to bridge
the gap with tqm and to introduce more modern management prac-
tices (Biazzo and Bernardi 2003; Sun et al. 2004) so that quality assur-
ance requirements and quality management aspirations can be aligned
holistically (Boulter and Bendell 2002). Theiso 9000:2000 series are also
formally based on a set of quality management principles, that are very
much in line with the principles of tqm and the principles of the most
popular quality and business excellence awards (Gotzamani 2005).
Most important changes, introduced in the iso 9000:2000 versions,
in adopting the tqm philosophy placed stronger emphasis on customer
satisfaction and an effective process-oriented approach focusing on con-
tinual performance improvement (Franceschini, Galetto, and Cecconi
2006). Researchers claimed that in order to survive in the highest com-
petitive business environment, the past approach of 'conformity to re-
quirements,' which aimed at achieving customer satisfaction by prevent-
ing nonconformity, is not enough. Instead, a more proactive system,
which is driven by 'customer satisfaction assurance,' should be intro-
duced (Tsim, Yeung, and Leung 2002; Magd and Curry 2003; Gotzamani
2005; Franceschini, Galetto, and Cecconi 2006).
Operations Strategy Framework
It has been recognized that manufacturing activities could contribute a
lot to business performance and this has been put to a posture of strat-
egy - the operations strategy (Sun, Hong, 2002). Skinner (1969) is the
pioneer in defining operations strategy. In his seminal articles Skinner
(1969; 1974) emphasised the need to 'link' manufacturing decisions with
overall corporate/business strategy and he developed the concept of in-
ternal and external consistency (Sun and Hong 2002; Boyer, Swink, and
Rosenzweig 2005). Business strategy specifies the scope of each business
(the range of products and markets in which the company or business
unit will compete) and defines the basis on which a business unit can
achieve and maintain a competitive advantage within its industry (Rus-
jan 2005). Porter (1985) developed the idea that all competitive strategies
are variants of generic strategies involving a choice between differentia-
tion and delivered cost (price), with degree of focus, i. e., serving niche
or broad markets, providing a second competitive dimension (Ward and
Duray 2002).
Business strategy has to be supported by appropriate performance
of all business functions. Operations strategy therefore studies what is
the role of operations in achievement of competitive advantage. This is
achieved through aligning capabilities of manufacturing with competi-
tive requirements of the marketplace (Voss, 1995; Dangayach and Desh-
mukh 2001). Various authors in operations strategy literature have used
different terms to describe such manufacturing capabilities, although
they have most often been referred to as competitive priorities in case re-
searchers meant intended capabilities, and as competitive capabilities in
case researchers meant realized capabilities (Ward, Bickford, and Leong
1996). Despite differences in terminology, general agreement exists in
the manufacturing literature about the dimensions of competitive capa-
bilities or priorities that are generic in manufacturing, which normally
include cost, flexibility (product mix and volume), quality (design and
conformance), delivery (dependability and speed), and innovativeness
(Flynn, Schroeder, and Sakakibara 1995; Dangayach and Deshmukh 2001;
Swamidass, Darlow, and Baines 2001). There is an apparent relation-
ship between Porter's types of competitive advantage and manufacturing
competitive priorities.
Manufacturing attempts to achieve its competitive priorities (objec-
tives) by formulating and implementing manufacturing strategy. In ac-
cordance with this, Maruckeck, Pannesi, and Anderson define operations
strategy as a 'collective pattern of coordinated decisions that act upon the
formulation, reformulation and deployment of manufacturing resources
and provide a competitive advantage in support of the overall strategic
initiative of the firm' (Marucheck, Pannesi, and Anderson 1992). Most
of the researchers give similar definitions (Dangayach and Deshmukh
2001). There is a general agreement about the strategic manufacturing
decision areas in which capability-building program choices are made.
Researchers agree about the set of strategic choices in manufacturing,
which were placed into two groups, structural and infrastructural by
Hayes and Wheelwright (1984) (Dangayach and Deshmukh 2001; Boyer
and Lewis 2002).
While the general framework for operations strategy is fairly well de-
fined and accepted, debate continues over the relationship between com-
petitive priorities. An important question associated with the alignment
of operations capabilities with the business mode of competing, and the
alignment of strategic decisions with operations priorities, is the ques-
tion of the existence of trade-offs among capabilities, which implies that
there is the need to trade-off between the various dimensions of manu-
facturing performance in order to best support the choice between cost
leadership or differentiation (Porter 1985) formulated at business unit
level (Dostaler 2001). This has been a major area of debate between the
supporters of the proposition that trade-offs are necessary, versus sup-
porters of a cumulative capabilities model specifying that capabilities can
be complementary and built simultaneously over time (Boyer, Swink,
and Rosenzweig 2005).
The important result of research related to competing views has been
that the idea of the possible multiple positive impact of a given prac-
tice has become generally acceptable. Distinction between the trade-off
and cumulative approach, after all, has not been as large as it might have
seemed. It has been more a matter of the degree of extremity in the defi-
nitions. Therefore the actual question is not whether a trade-off or a cu-
mulative approach is the right one, but with what activities and to what
degree different capabilities can be cumulated (Flynn and Flyn 2004).
Analysis of Criticism of iso 9000:1994 from operations Strategy
Theory Perspective
We use the operations strategy framework as a basis for comparative
analysis of iso because of similarities between the two and because of
their relationships. The purpose of iso 9001:1994 has been clearly rec-
ognized as conformance, which represents one of the competitive pri-
orities/capabilities emphasized within the operations strategy. From this
perspective the old series of standards was congruent with the opera-
tions strategy framework. In fact, iso actually nicely describes the logic
of operations strategy. If the conformance is defined as strategic priority
(either an order winner or a qualifier) within business strategy develop-
ment, different activities have to be implemented in order to develop a
certain level of this capability within different business functions of the
company. The iso quality system represents an example of a set of ac-
tivities that have to be implemented in order to achieve conformance
capability. Therefore both the iso and the operations strategy frame-
work represent a rational, prescriptive, top down approach of decision
making, with its emphasis on the formulation of plans for subsequent
implementation.
The role of operations strategy is to support the implementation of
business strategy through determining policies, and necessary activities
within operations strategic decision areas. The role of iso 9001:1994 has
been similar, and consistent with this framework, however we can iden-
tify two differences between the two: the first difference was that iso was
narrower, as it had to provide practices needed only for the implemen-
tation of one of the competitive priorities, and the second that it was
broader as - still in accordance with the logic of the operations strategy
framework - it included not only activities within operations, but also
other business functions. Therefore iso developed activities that needed
to be implemented within operations (and considering the analogy also
within other business functions) in case business strategy identified con-
formance as an important competitive priority. So iso 9001:9004 was
taking care of the implementation part for one of the competitive pri-
orities. Empirical research confirms that iso has developed appropriate
levers to build conformance capability (Sun 2000; Gotzamani and Tsio-
tras 2002). So the question is: why has iso 9001:1994 received so much
criticism?
Discussion Related to Conceptual Criticism of iso 9001:1994
From the operations strategy framework it seems that most of the con-
ceptual criticism of iso 9000:1994 can be related to the definitional prob-
lems of quality brought up by Garvin (1984), Reeves and Bednar (1994)
and associated multidimensionality of the quality concept (Garvin 1984).
Garvin (1984) and Reeves and Bednar (1994) identified five approaches
to defining quality, among which three were most commonly used by
quality researchers and are also important for our research:
•	The manufacturing-based approach defines quality as conformance
to specifications. In the manufacturing-based approach, improving
quality leads to lower costs, as preventing defects is viewed as less
expensive than repairing or reworking them.
•	In the user-based approach quality is defined as the extent to which
a product satisfies the individual customer's wants, needs, and ex-
pectations. Firms can include numerous attributes and weights
when trying to judge expectations.
• Value-based definitions emphasize that both price and quality have
to be considered in a competitive market as consumption decisions
which are based on both price and quality.
To overcome the conflicting definitions of quality, Garvin (1984) sug-
gested an eight-dimensional framework for thinking about the basic
elements of product quality: performance, features, reliability, confor-
mance, durability, serviceability, aesthetics, and perceived quality. Re-
searchers emphasized that continued inquiry and research into quality
and quality-related issues must be built upon a thorough understanding
of differing definitions of the construct (Reeves and Bednar 1994). This
is important because provision of different quality dimensions poses dif-
ferent demands on different organizational functions (e. g. marketing,
design, manufacturing, purchasing) and may require different organiza-
tional practices depending on the quality dimension in question (Flynn,
Schroeder, and Sakakibara 1995). Why is this important for analyzing the
conceptual criticism of iso?
If we look into conceptual criticism of iso 9001:1994 from the opera-
tions strategy theory framework, we see that iso has mostly been criti-
cized for doing exactly what it was supposed to do, i. e. providing appro-
priate levers for building conformance capability. Conceptual criticism
that iso 9001:1994 did not provide high quality of the product or as-
sure that the product would be attractive to the consumer (Curkovic and
Pagell 1999; Tummala and Tang 1996; Magd and Curry 2003) is related
to the misinterpretations of the iso's purpose and role. Criticism that
iso did not provide product quality is based on neglect of the multi-
dimensionality of quality concept. Researchers did not use an appropri-
ate definition of quality, and they based their criticism on interchanging
two dimensions of quality, conformance to specifications and product
performance (design quality).
We emphasized that the original purpose of iso 9000 standard pro-
cedures has been to guarantee, that products meet agreed customers
requirements. Therefore the iso 9000:1994 standard represented a spe-
cific decision making process which had a specific and clear purpose to
ensure a supplier's conformance to specified requirements. It is impor-
tant to notice that the standard's goal has not been the determination
of the appropriate level of product and service technical requirements.
The level of technical sophistication had to be determined beforehand
in some other decision making process, and technical specification rep-
resented an input into the iso 9001:1994 quality system. In accordance
with its purpose, the standard appropriately completed its goal to deter-
mine and describe different levers that have to be developed, established,
instituted, and emphasized within the company in order to achieve the
conformance purpose. Researchers and iso itself emphasised that qual-
ity system requirements specified in the iso standards were considered
complementary to technical product and service requirements (Tum-
mala and Tang 1996; Kartha 2004; Van der Wiele et al. 2005). What this
actually meant was that the level of the product quality was external to
iso.
What should product characteristics be, or what level of product qual-
ity do we want to achieve, or which customers are the right ones to ne-
gotiate requirements with, as they belong to the company's target cus-
tomer group, is something that has to be determined within business
strategy based on market segmentation and on targeting the appropri-
ate customer group. Regardless of what desired level of product quality
has been determined within business strategy, iso has to achieve confor-
mance to specifications. This is valid even though the company does not
compete on the high quality of its products. Therefore researchers were
right that compliance to the standards did not necessarily prevent an or-
ganization from producing 'poor-quality' products (Kartha 2004). But
the reason for this has been that the level of product quality was external
to iso as it has been determined within business strategy. The goal of
iso has not been to determine the desired level of product quality and to
provide levers needed to improve product quality. As mentioned above,
the achievement of capability related to this quality dimension would
usually require different activities.
In relation to iso's focus on conformance to specification, researchers
often inappropriately concluded that a certification's requirements rep-
resent the minimum common factor for any quality system focusing
on process rather than product/service quality (Gavin, Gallimore, and
Brown 2002; Van der Wiele et al. 2005; Magd 2008). We said inappropri-
ately, because iso does not represent a minimum, we could even say it
represents a maximum for assurance of conformance capability. The iso
system is a quality system, which is well designed in accordance with its
conformance purpose, however it is not a system for the improvement
of product quality, and has never meant to be. But describing iso as a
minimum characteristics quality system shows that researchers viewed
iso as being too narrow, although it was fulfilling its purpose.
Researchers emphasised the need for a broader view of iso when they
were referring to customer focus and customer satisfaction. In fact they
explicitly criticised iso for being too narrow, and not have been cus-
tomer focused. As Reeves and Bednar (1994) pointed out, the major ad-
vocates (Crosby, Deming, Feigenbaum, and Juran) of a conformance-to-
specifications definition of quality stressed that customers' wants must
be the driving force of specifications that are established. So the stan-
dard was customer focused. They also claimed that if customers' needs
are governed by specific requirements or standards, as they would be for
many industrial customers, conformance to specifications is the most
objective, appropriate, and easily measured definition of quality. How-
ever this definition might be problematic for services, since 'when speci-
fications cannot be established or conformance to them actually detracts
from the quality of the service, defining quality as conformance to spec-
ifications results in lower, not higher, quality' (Reeves and Bednar 1994).
Another problem is that many if not most consumer goods are not evalu-
ated in terms of conformance to specifications. As iso has been expand-
ing also into consumer goods industries and services, the conformance
quality definition began to seen narrow, and the focus on customer need
started.
By looking into the emphasis on satisfying customer needs from the
point of view of approaches to quality definitions mentioned above, we
can see that criticism of the lack of customer focus really represented a
change in approach to quality definition. Researchers made a shift from
the manufacturing-based towards the user-based definition. But what
does this change in the definition of quality mean if we look into it from
the perspective of the operations strategy framework? It means that the
focus is broadened, including not only conformance priorities but also
other operations strategic priorities (Curkovic and Pagell 1999). Sun, for
example, points out that in Japan and other countries, 'quality circle' is
still termed 'quality circle' although it may deal with cost, delivery and
service problems, and that this does not imply that quality is 'dead,' but
that all other performance factors such as productivity, flexibility, deliv-
ery and innovation are alive (Sun et al. 2004).
From this perspective of change in the definition of quality also other
types of conceptual criticism of iso 9001:1994 become clear, and can be
similarly dismissed as they are based on the change of quality definition,
and therefore deny iso's original purpose. We can see that the fact that
iso 9001:1994 limited itself to serving as a base for continuous improve-
ment, understood as a continuous reduction of non-conformities was in
accordance with its purpose. As mentioned, iso represented a consistent
decision making cycle with its specific purpose, and therefore this deci-
sion cycle could not primarily provide continuous improvement related
to other purposes.
It is commonly accepted among quality researchers that quality must
be defined by the customer, and therefore all product or service attributes
that contribute value to the customer and lead to customer satisfaction
need to be addressed. Consequentially the simple and internally oriented
requirements of the iso 9001 standard received serious doubts and crit-
icism as to the extent to which they could guarantee quality through
customer satisfaction. Our analysis showed that iso 9001 can contribute
to customer satisfaction through achievement and continuous improve-
ment of product conformance (and associated benefits discussed in the
next section) in accordance with the manufacturing-based definition
of quality, however it can't contribute to customer satisfaction through
achievement and improvement of product performance (design quality)
in accordance with the user-based definition of quality.
Discussion Related to Empirical Research Criticism of iso
9001:1994 Results
Regarding the criticism in empirical research, it seems that it is mostly
based on neglecting the theoretical base of possible impacts of activities
implemented within the iso system. The problem was that design of the
research often has not been based on the theoretical basis that could be
drawn from the operations strategy literature. If we take into account the
operations strategy framework, empirical studies should search for the
direct impact of iso practices on different capabilities. Although iso's
basic purpose was identified as conformance, this does not mean that ac-
tivities implemented within the iso system could not improve also other
capabilities. In fact they do, and there is a conceptual theoretical explana-
tion for that, as well as empirical confirmation. Based on the cumulative
capabilities approach it is generally accepted within operations strategy
that specific practices can have positive effects on different capabilities.
Also most of the cumulative capabilities models have emphasized that
quality activities represent the basis for the build up of other capabili-
ties (Flynn and Flynn 2004). Garvin (1984) developed a theoretical base
from which it can be implied that iso practices could affect not only
conformance, but also efficiency and productivity, and that conformance
capability is also usually positively related to some other dimensions of
quality.
Most of the empirical research that studied iso benefits has identified
a positive impact on what researchers usually called internal efficiency,
which include: clearer definition of their processes and responsibilities
that have resulted in reduction in product defects, rejections and claims;
reduction in rework and warranty cost (Sun 2000; Santos and Estanciano
2002; Gotzamani and Tsiotras 2002). On the other hand we found only
one empirical study which tried to identify the impact of iso on different
dimensions of quality. Based on case analysis of 11 European companies,
Withers and Ebrahinpour (2000) found out that iso often had a positive
impact not only on conformance, but also on perceived quality, service-
ability, and reliability as well, in case these presented order winners for
companies. On the other hand, the results showed moderate or null im-
pact on performance, features, and aesthetics dimensions. These results
confirm our discussion related to the impact of iso 9001 on product per-
formance (product design) in the previous section.
Therefore there is a theoretical foundation, as well as empirical con-
firmation, that implementation of iso 9001 practices has a simultane-
ous positive impact on different competitive capabilities in accordance
with the cumulative capabilities framework. This was probably one of
the important reasons why iso has gained such popularity and has
been so widely introduced globally. But on the other hand, research
identified also some trade-off characteristics of implemented iso activi-
ties. Researchers mostly identified trade-off impacts associated with iso
implementation on flexibility capability. Implementation of the stan-
dards may result in the development of a static quality system that
increases bureaucracy and reduces flexibility and innovation (Fuentes
et al. 2000; Martinez-Lorente and Martinez-Costa 2004; Gotzamani,
Theodorakioglou, and Tsiotras 2006). Loss of flexibility and the rigid
documentation may tend to hamper the ability of a company to change
quickly (Tsim et al. 2002).
More problematic from the point of view of considering the theo-
retical base of possible impacts of activities implemented within the
iso system, were studies that were analyzing effects of iso on compet-
itive advantage, customer satisfaction, increased sales, company's finan-
cial performance, and similar. These studies often found that iso did
not have an important impact, but mostly showed controversial results
(Martinez-Costa and Martinez-Lorente 2007). The studies mostly tried
to identify the direct impact of iso introduction on the mentioned per-
formance measures. Rarely have studies used moderating variables, for
example Terziovski, Samson, and Dow (1997) used 'strong' and 'weak'
tqm environment as a moderating variable. Based on the operations
strategy framework studies should have taken into account strategy as a
moderating, control variable or mediating variable, when trying to iden-
tify such impacts. From the operations strategy perspective it is clear that
conformance capability which is the purpose of iso, represents only one
element of a company's competitiveness. And regarding the company's
competitiveness, conformance could either have the role of order win-
ner, and in this case represent an element of competitive advantage, or
else it could have the role of a qualifier (Hill 1994). However as men-
tioned above, iso practices affect different competitive capabilities, and
through them they also can have an impact on competitive advantage,
customer satisfaction, sales, and profitability. But what this impact would
be depends on the competitive strategy ofthe company, i. e. whether con-
formance and other capabilities on which iso implementation had an
effect represent order winners or qualifiers within the company. Each of
the possible situations would lead to different consequences regarding
iso's impact.
Within operations strategy research different authors have studied the
impact of quality practices on company performance, however they took
the operations strategy framework into account (Flynn, Schroeder, and
Sakakibara 1995; Fynes and Voss 2001). Research by Flynn et al. shows
that competitive advantage is a multifaceted construct, and that besides
quality there are other factors that contribute to competitive advantage.
This suggests that focusing solely on quality improvement may not be
a sufficient means for a plant to attain and sustain a competitive posi-
tion. A study done by Fynes and Voss showed that there is no evidence
to support the proposition that improved quality performance is posi-
tively related to improved overall business performance, which was con-
trary to the results of pims (Profit Impact of Market Strategies) stud-
ies that provided support for the relationship between product quality
and firm performance. They explained this with an argument that in
many marketplaces, the role of quality performance has changed from
that of order-winner to order-qualifier, and as such is a necessary but
not sufficient contributor to overall business performance, and there-
fore the contribution of quality performance to business performance
may have changed. We claim that research studies of iso benefits should
follow approaches similar to those used by authors in operations strat-
egy research to identify the results of iso implementation. They should
take into account that the basic purpose of iso 9001 is conformance, and
that conformance represents just one element of the quality dimensions
and just one among many possible differentiators that a company could
choose from in the attempt to achieve a competitive advantage.
The view that competitive strategy should be used as a moderating
variable is also indirectly supported by the results of empirical research
studying iso benefits. Empirical research has shown that so called ex-
ternal benefits of iso implementation changed in time. Santos and Es-
tanciano (2002) noted in their study that other benefits of a clearly com-
mercial nature, such as 'sales increase,' 'market share increase' and 'ex-
port increase,' which was considered to be the most important in the
oldest studies, received the lowest benefits score. This can be related to
other studies which claimed that conformance in the early eighties repre-
sented an order winner, but later rather became a qualifier (Garvin 1984;
Flynn, Schroeder, and Sakakibara 1995; Fynes and Voss 2001; Sroufa and
Curkovic 2008).
That iso 9001 has generally been accepted as a qualifier in the modern
business setting (Terziovski, Samson, and Dow 1997; Fuentes et al. 2000;
Douglas, Coleman, and Oddy 2003; Sroufa and Curkovic 2008), is, be-
sides the cumulative capabilities characteristics of activities implemented
within iso, that we already mentioned, probably the second reason for
such a wide implementation of iso globally. Garvin (1984) argued that
conformance is a more objective measure of quality, because virtually all
users regard it as desirable. If we consider that conformance represents
a qualifier it also becomes understandable that its impact on compet-
itiveness, customer satisfaction and company performance will not be
of high importance. Therefore the strategic contingency in iso imple-
mentation might explain the controversies in empirical results about iso
benefits.
In fact empirical research of iso benefits implicitly acknowledged
strategy contingency. However they did this indirectly, as empirical re-
search identified motivation for iso implementation as an important
factor determining iso implementation benefits. Motivation for iso
implementation can be interpreted as strategy contingency based. We
explained that in accordance with the operations strategy framework
companies will introduce iso either because conformance is an order
winner, or because it is a qualifier. Regarding the motivation of the intro-
duction of iso 9001, the literature recognizes two groups of imperatives:
external or market driven imperatives and internally- or improvement
driven reasons (Martinez-Costa and Martinez-Lorente 2007). It can be
implied that in case companies are externally pressured to introduce of
iso, conformance represents a qualifier, and when companies wanted
to improve processes and internal efficiency, conformance represents an
order winner. Empirical research shows that companies with internal
motivation for the implementation of iso achieved better performance
results, while companies that introduced iso based on external pressure,
on the other hand, achieved lower performance results (Huarng, Horng,
and Chen 1999; Singels, Ruel, and van de Water 2001; Heras, Dick, and
Casadesus 2002; Llopis and Tari 2003; Terziovski, Samson, and Dow 1997;
Arauz and Suzuki 2004).
We can conclude that, although unwillingly, as instead they were
searching for results that could not be (or at least only by taking contin-
gencies into account) conceptually contributed to iso 9001 implemen-
tation, researchers were actually confirming that the iso based quality
system has been appropriately functioning for achieving the purpose
for which iso standard has been designed. Although the results lead
to researchers' criticism of iso, they in fact confirmed that the levers
included into iso requirements were the right ones as they improved
conformance and contributed to associated gains in efficiency.
Conclusion
The paper has analysed the iso 9001 system using the operations strategy
framework for a basis comparison. Similarities between the two enabled
us to clearly define the purpose of the iso 9001 system and the scope of
its possible results. This is important both, for practitioners, as well as
for researchers.
Empirical research confirms that, in accordance with its conformance
purpose, iso 9001 is successful in building conformance capability and
that by using iso 9001 practices companies can also benefit in relation
to production economics through improved process efficiency, and also
to other competitive capabilities. On the other hand practitioners can-
not expect iso to improve the level of product quality, and consecutively
provide associated customer satisfaction and continuous improvement.
Improving the level of product quality is not within the scope of iso
9001; instead it has to be determined within the process of developing
business strategy.
Therefore all requirements of iso 9001 have to be interpreted in rela-
tion to product conformance. For example, in monitoring performance
through measuring customer satisfaction within iso requirements we
should only measure whether we achieved product conformance (for ex-
ample by collecting data about customer complaints) or satisfaction of
the customer by our meeting product specifications. If conformance to
specifications was achieved to a certain degree, the iso system worked
well. Therefore the customer satisfaction measurement within iso 9001
cannot measure customer satisfaction in general, because the general
goal of achieving customer satisfaction is based on the achievement of
different capabilities - which are part of another (and broader) business
strategy decision making process.
By looking into iso 9001 from the point of view of the operations
strategy framework, we could also better understand the expected scope
of empirical results. We emphasised that empirical results expected from
iso 9001 implementation are strategy contingent and therefore this
should be taken into account in designing empirical studies about iso's
benefits. The impact of iso 9001 on competitive advantage, sales and
profitability depends on the role of conformance and other capabilities
affected by iso implementation within a company's strategy. An impor-
tant impact can be expected in case conformance and other capabilities
affected by iso implementation represent order winners of the company.
The old iso 9001 has been mostly criticized regarding its lack of cus-
tomer focus, however the paper showed that this criticism has in fact
been based on a user-based definition of quality, where iso 9001 has ac-
tually been correctly implemented following the manufacturing-based
definition. Taking this into account, it became clear that is not true that
relation with customers did not exist in the previous version of iso 9001,
in fact originally in iso the specifications were given by the customer.
They were based on a contract between the company and the specific cus-
tomer. With the new emphasis on customer satisfaction the purpose of
iso 9001 could switch from conformity to competitiveness. So the ques-
tion then arises, whether iso should become the standard of strategy im-
plementation instead of the standard for assurance of meeting product
specifications.
We showed that such expectations of iso were based on interchang-
ing two definitions of quality. Changing from a conformance-based ap-
proach to a user-base approach can be understood from the point of
view of needs of service and consumer goods industries. However such
a change in the purpose of iso 9001 would mean that its focus is broad-
ened, and therefore iso would also have to introduce new levers needed
for achievement of other capabilities. Changing the purpose of iso to
resolve problems related to these industries therefore is not an appro-
priate solution. Instead of broadening the purpose of the standard, we
should search for new approaches as to how iso 9001 requirements for
conformance could be improved in the case of the consumer products
and services. In consumer markets the customer might not be able to ex-
press his/her needs directly, therefore the question of whether customer
needs have been properly included into product specifications becomes
important. Maybe iso could include requirements that would confirm
that target customer groups have been appropriately determined and
that their requirements have been appropriately translated to product
specifications (for example through use of the qfd method). Determina-
tion of specifications in the service setting is also difficult because of their
characteristics. Application of existing and new research for the purpose
of standardization and certification is needed, both for consumer mar-
kets and for services in order to help determine approaches for prod-
uct/services characteristics, and conformance policies.
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the dimensions of quality used for competitive advantage? European
Management Journal 18 (4): 431-43.
2010
Management International Conference
Social Responsibility
and Ethics of Management
11th Management International Conference
Organised by the Faculty of Management Koper,
University of Primorska, Slovenia,
Euro-Mediterranean University, Slovenia,
and Hacettepe University, Turkey
24-27 November 2010
Ankara, Turkey
(A
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Conference Aims
Management International Conference is a traditional conference
for scholars of management studies, welcoming participants
from around the world, with broad and diverse research inter-
ests. Among the many topics related to management, the special
focus of MIC 2010 is on social responsibility and ethics of man-
agement. Issues of ethical management, social sustainability
and cohesion of organisations, fair remuneration of workers and
management have become prominent during the recent financial
crises. The year 2010 was also declared the European Year for
Combating Poverty and Social Exclusion.
The aim of the conference is to present and discuss research that
contributes to the sharing of new theoretical, methodological and
empirical knowledge, and to a better understanding of manage-
ment practices, in particular in the field of social responsibility
and ethics of management. In recent years, the MIC Conference
has been organised in partnership with the newly established
Euro-Mediterranean University. Papers related to issues of inter-
cultural dialogue and management in multicultural societies are
thus especially welcome.
Conference Subject Areas/Sessions
Contributions from various areas of management are welcome, also scholars in
other disciplines offering new perspectives on the conference theme are
encouraged to participate.
The conference will focus on the following topics:
•	Business Administration, Organisation, and Marketing
•	Creativity, Innovation, and Technology
•	Doing Business in Mediterranean Region
•	E-business and Information Technology
•	Economy, Finance, and Law
•	Ethics and Management
•	Knowledge Management and Human Resources
•	Management and Education
•	Management in Multicultural Society
•	Research Methods
•	Small Business and Entrepreneurship
•	Social Issues in Management
•	Sustainable Development
Important Dates
E-registration through Conference website open: February 1, 2010
Abstract/Paper submission: April 30, 2010 (all submissions
will be subject to a double-blind review process)
Notification of acceptance: June 15, 2010
Final Paper submission: August 15, 2010
Conference duration: November 24-27, 2010
Registration Deadlines
Early registration: August 15, 2010
Late registration: October 1, 2010
Contact
Faculty of Management Koper
Cankarjeva 5, SI-6104 Koper, Slovenia
T: +386 5 610 2032
F: +386 5 610 2015
E: mic@fm-kp.si
www.mic.fm-kp.si
University of Primorska
Faculty of Management Koper
University
vvr// EMUNI
Managing Global Transitions
International Research Journal
AIMS AND SCOPE
The journal Managing Global Transitions
is aimed at providing a forum for
disseminating scholarship focused on
transitions. The journal seeks to publish
ground breaking work in management
research that will provide integrated and
diverse perspectives on the processes of
change and evolution in a broad range of
disparate fields, including systems theory,
leadership development, economics,
education, industrial relations, law, sociology,
informatics, technology, decision-making
theory, and action learning. To further the
understanding of transition environments
internationally the journal aspires to enhance
the availability of case studies and analysis of
data from different cultural environments in
public, non-profit, and corporate contexts.
INFORMATION FOR AUTHORS
Manuscripts are accepted on the understan-
ding that they are original and not under
simultaneous consideration by any other
publication. All manuscripts are double-
blind peer reviewed.
Manuscripts should be prepared following
The Chicago Manual of Style.
Manuscript Style
•	Manuscripts should be submitted
electronically via e-mail. We accept files
created with all major word processing
packages, but prefer MS Word and ltex.
•	The editors reserve to right to return
to authors, without peer review,
improperly formatted manuscripts.
•	Papers should be between 5000 and
6000 words in length, accompanied by
a 100-150-word abstract, and no more
than five key words and two areas of jel
classification (see http://www.aeaweb
.org/journal/jel_class_system.html)
on a separate sheet.
•	The title page must list full title,
author(s) address, and e-mail.
•	Paper size should be A4. Margins should
be set for a 25 mm (1 in.) top, bottom,
left, and right. The point size should be
12 and the font should be Times New
Roman. Italics should be used for
emphasis and bold for headings. Put
blank lines between paragraphs and
differentiate major and minor headings.
•	Footnotes are not permitted. Endnotes
are permissible but should be kept to a
minimum.
•	All illustrations and tables should be
grouped at the end of the text.
Reference Style
The author-date system of citation for
references should be used in the text, followed
by page number if a direct quotation is given,
e.g., (Jackson 1979,181). The alphabetized
reference list should be titled 'References'
with entries in the following format:
Beech, M. H. 1982. The domestic realm in the
lives of Hindu women in Calcutta.
In Separate worlds: Studies of purdah in
South Asia, ed. H. Papanek and G. Minault,
110-38. Delhi: Chanakya.
Jackson, R. 1979. Running down the
up-escalator: Regional inequality in Papua
New Guinea. Australian Geographer 14 (5):
175-84.
Lynd, R., and H. Lynd. 1929. Middletown:
A study in American culture. New York:
Harcourt, Brace and World.
University of Chicago Press. 2003. The
Chicago manual ofstyle. 15th ed. Chicago
and London: University of Chicago Press.
copyright notice
Copyright for all articles published in
Managing Global Transitions is held by
individual authors.
subscriptions
Annual subscription (four issues):
individual rate € 39,
institutional rate € 49.
Prices include postage.
indexing and abstracting
Managing Global Transitions is
indexed/abstracted in the International
Bibliography of the Social Sciences,
EconLit, RepEc and doaj.
The journal is supported
by the Slovenian Book Agency.
Printed in Slovenia by Degraf, Koper.
Print run: 2000.
Managing Global Transitions
International Research Journal
volume 8 • number 1 • spring 2010 • issn I58I-63II
3 Board Structure and Corporate Performance
özgürArslan
Mehmet Baha Karan
Cihan Ek§i
23 The Valuation of Slovene Publicly Traded Companies with
a Valuation Model Based on Expected Earnings
and Growth Opportunities
Igor Stubelj
49 The Impact of Firm Size on Dividend Behaviour: A Study With
Reference to Corporate Firms across Industries in India
Azhagaiah Ramachandran
Veeramuthu Packkirisamy
79 Change Management in Adult Educational Organizations:
A Slovenian Case Study
Romana Martinčič
97 Understanding iso's 9001 Benefits and Research through
an Operations Strategy Framework
Borut Rusjan
Pavel Castka
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