MATHEMATICAL MODELLING AND THE EMPIRICAL VALIDATION OF ORGANISATIONAL FINANCIAL PERFORMANCE – CONCEPTUAL INSIGHTS INTO THE INFERENTIAL FOCUS OF THE ANALYTICAL PERSPECTIVES IN THE FINANCE DISCIPLINE

Purpose of the Study: This study traces the evolution of analytical methods in building Finance Theory with a view to strike an ‘optimal' balance between the analytical rigour and the realworld inferential insights. Methodology: The theoretical developments in the latter half of the 20th century, in the field of Finance, have focused, extensively, on the Analytical basis of sound theory building and its Empirical validation using the Statistical tools. The pioneering work of Miller and Modigliani that analytically established the relationship between the firm's financial leverage (Debt component) and the Value of the firm, under varying assumptions marked the beginning of analytical approaches to building Finance Theory. The corporate bankruptcy model developed by Altman was also studied. The subsequent empirical studies have also been examined to assess the practical validity and relevance of their findings. Main Findings: a) While the analytical modelling, by virtue of its elegance of logic and causation, has been widely acclaimed as the most efficient tool of theory building, it is beset with certain inherent limitations. More specifically, the field of Social sciences, which includes several functional areas of management, is intrinsically determined by behavioral factors and therefore, the stand-alone mathematical modelling (that overlooks the ‘unpredictability' of behavioral parameters) is fraught with the danger of erroneous conclusions. b) The Behavioral parameters are, in turn, determined by the psycho-sociological, ethnic, geographic and other factors; this makes the ‘analytical' handling of the behavioral parameters more cumbersome and therefore inefficient. c) The ‘percolation' of Statistical analysis into conceptually deterministic models has blurred the researcher's distinction between the Stochastic and Deterministic (tautological) models thereby, resulting in ‘proving' the obvious. d) Finally, the article concludes with the observation that the utility of mathematical modelling can be enhanced by articulating the broad contours of causal relationships among the various parameter so as to gain tangible insights into the real-life decision situations and also by suitably modifying the rigidities of the model to suit the ‘nuances' of the specific situation. In other words, the researcher should stress more on the ‘spirit' of the model as opposed to its elegantly framed ‘structure' of equations. Applications of this Study: This study is expected to make the Finance researchers to focus on the inferential insights into the ‘quantitative' parameters emerging from the analytical models so as to enhance the utility of Analytical methods employed in Finance.