Abstract
We examine the relationship between quality and reputation signals
and firm's product market performance at empirical level. Using data
of 533 Indian listed firms over the period 1989-2000, we compare
the behavior of top 50 business group firms with the small group
and private standalone firms. The empirical results suggest that
real market signals like advertisement, marketing, distribution,
research and development, ISO third party quality certifications
significantly affect firms' performance. Financial decisions by firms
in the capital market like issue of commercial paper and debentures
may also act as additional signals of firm specific qualities in
the product market. For instance, the total sales go up by 2.4% for
top 50 business group firms and by 2.5% for non-top 50 firms with
a one standard deviation increase in commercial paper as a fraction
of assets. Similarly, an increase in debentures relative to assets
leads to 9.5% increase in sales for non-top 50 firms in comparison
to a 4.7% increase for top 50 firms. We also find that DFI lending
helps firms increase expenditure on advertising for product promotion,
build distribution networks, increase marketing efforts and research
and development, and thereby, boost sales growth significantly in
the long run. From regression results and various univariate tests,
we find strong empirical evidence that firms' financial decisions
drive product market outcomes. © 2005 Elsevier Inc. All rights reserved.
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