A study on the relationship of market capitalization and macro economic factors (With special reference to Indian information technology industry)

Stock market operations in India have undergone vicissitudes of far reaching importance in the last decade. The movement of stock market indices which represents market capitalisation is highly sensitive to the changes in fundamentals of the economy and to the changes in expectations about future prospects. The industry and its firms are not only affected by its internal performance (micro fundamentals) but also affected by the monetary and fiscal policies (macro fundamentals) of the country. The study has adopted a time series approach in the analysis and the quarterly data have been used for the period 2003 to 2011. The sample Information Technology firms were chosen from BSE500 Index. After transformation of data into natural logarithms, the data have been tested for the co-integration and causality in the model. The results of the multiple regression analysis of the market capitalisation indicates that 91 per cent of the variation in the market capitalisation for the study period has been explained by the variables included in the equation viz., Equity and Liquidity. The variable “equity” has more influence on the increase in the market capitalisation than the variable liquidity. The time series analysis reveals that there is a long term cointegrating relationship between market capitalisation, equity and liquidity. The results of the granger causality test establish that there is only a unidirectional relationship between equity and market capitalisation while there is a bidirectional relationship between liquidity and market capitalisation. Hence the macro market capitalisation model developed in the study is of practical use to the corporate policy makers and policy framers of the government to put in right strategy to combat the financial mess prevailing in the slow down.