Corporate Board Structure and Foreign Equity Investments in Weak Institutional Regimes

Abstract

This study explores how corporate board structure gives the ability to firms to attract foreign equity investments in economies affected by weak institutional regimes taking India as the experimental setup. Concentrated ownership, along with the absence of effective external governance mechanisms, weak legal enforcement and pervasive corruption, resulted in the aggravation of Type II agency problems in these countries. Moreover, the increased presence of controlling owners on corporate boards exerts significant influence thus increasing the severity of the said agency problem. Using a sample of large publicly listed Indian firms between the periods 2010–2014, our study reveals that in a setting where institutional framework is not well developed and Type II agency problems are believed to exist in a large measure, the board plays a vital role to inform foreign investors about possible chances of being expropriated which influence their investment decisions in terms of having equity ownerships in firms.