1Assistant Professor, Department of Management Studies, National Institute of Technology, Tiruchirappalli
2Department of Management Studies, National Institute of Technology, Tiruchirappalli
Online published on 11 September, 2015.
An attempt has been made in this paper to test Fama's Semi Strong Form of Efficient Market hypothesis in the Indian capital market. The Semi Strong Form of Efficient Market has the underlying assumption that all the public information is incorporated into stock price. In order to test these hypotheses, we have used market valuation measure of Tobin's Q and financial distress model of Z score analysis. The reason for choosing these measures is that they have almost used all the public information for calculation. Apart from this, this paper also tries to predict future performance of the firm through Tobin's Q. For this purpose, the Discriminate Model is constructed based on the decision rule that if firm's Q value is more than 1, then the firm has low probability of entering financial distress. This paper has following premises for constructing the Discriminate Model that If the firm secures Tobin's Q more than 1, it is financially healthy (Q>1) or else, it is sick (Q<1). The Tobin's Q Discriminate Model predicted that the 56 firms (from the sample of 64 firms out of the total sample of 148) are financially healthy and probabilities of going bankrupt for these firms are nil. In order to validate our model, we run Altman Z score analysis on the same sample of 64(Where Tobin's Q value more than 1)and it predicted 52 firms (Z score is greater than 2.90) are financially sound. Hence, it is concluded that our model has predictive ability very similar to the Altman Z score analysis in predicting the future corporate performance.
